Your 401 (k) Is Making a Statement

What has changed, though, is that the labor force has doubled. New companies aren't rolling out pension plans. Instead, they do 401(k) plans, or some variant, known collectively as "defined contribution" plans.

Dallas Salisbury, President and CEO of EBRI, agrees that there was no golden era of pension-supported retirement. "You never had more than 30% of those hitting retirement age that had been with one company long enough to get a meaningful pension," says Salisbury. "For the other 70%, the pensions were never there. Even in the heyday of long tenure, only 30% got the gold watch."

Of course, "retirement" is a totally modern notion, a consequence of the demographic changes resulting from our dramatically increased life expectancy. A hundred years ago, people didn't spend 20 years imagining retirement. Most people didn't live past 65.

Finally, there's some bad news about saving 6% of your pay, taking your 3% match, and retiring in 2037 as a millionaire. Even with a modest inflation rate of 3%, in 2037, that $1 million will feel like $467,000 in today's dollars. Which means, assuming that you protect the principal, that your 401(k) will provide a secure retirement income that feels like about $23,000 a year.

Here's a cautionary insight. At Fidelity and Vanguard, employees have 401(k)s, of course. But Fidelity also provides a pension program, and Vanguard contributes 10% of its employees' salaries to a retirement account that is separate from any 401(k). For the welfare of their own employees, two of the most important 401(k) providers don't rely on the 401(k) alone.

You might want to double up on your deferral.

The Father of the 401(k)
What in the world does "401(k)" mean, anyway? It's a standard reference to a part of the total body of federal law, the U.S. Code. The full "address" is Title 26 (the tax code) of the U.S. Code, Subtitle A, Chapter 1, Subchapter D, Part 1, Subpart A, Section 401: "Qualified pension, profit-sharing, and stock bonus plans."

Subsection K is titled "Cash or deferred arrangements." I've been to visit 401(k) -- these days, that one small part of section 401 is almost as long as this article -- and I want to offer you the opening line: "A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred arrangement."

Shall not be considered as not satisfying?

What's amazing is that anyone could read material like that and have a creative thought about it. Ted Benna did, on a quiet fall Saturday in 1980. In fact, 401(k), as rewritten in 1978 to become law in 1980, wasn't intended to create the 401(k) accounts we enjoy today. It was a tweak to fix some ambiguities in the rules about a type of savings plan that already existed. But the provisions of 401(k) could be interpreted, it turned out, to permit 401(k) accounts. That was Benna's insight. It was Ted Benna, not Congress, who came up with the brilliant idea for a savings account that could help us retire in comfort.

Benna wasn't exactly browsing the tax code. He was a 39-year-old benefits consultant who had gotten his start at 19 as a "math clerk" for Provident Mutual Life Insurance Co.

The particular Saturday that he invented, or discovered, the 401(k) account, he was working on how to improve the savings plan of a bank that was a client. Taking nothing at all from Benna, the 401(k) didn't spring fully formed from his brain. Thrift savings plans, even tax-protected savings plans, had been around for years. The 401(k)'s cousins -- the 403(b) account for nonprofit employees and the 457 account for government employees -- already existed (457 was created in the same legislation that revised 401[k]). No equivalent existed for companies, though.

So when inspiration struck, says Benna, "I realized this could get pretty big, pretty fast." Indeed, after winning IRS approval, and after months of effort with the brothers who owned the small firm that he worked for, it was clear that Benna was on to something. The firm eventually grew from 75 people to 300 people and became a top-25 provider of 401(k) services before being sold in 1990. The first 401(k) was at that firm, the Johnson Companies.

Benna, now 60, is well-known in the 401(k) world and is well-regarded. He has moved with his wife to a modest riverfront home in a tiny central Pennsylvania town, Jersey Shore, and he's a consultant. He has no illusions about human nature, but an actuary's impatience with it. Of the roller coaster of people's 401(k) balances in the past few years, he says, "People naturally want to take credit when they are doing well, and they want to blame someone else when they are hurt."