BELLEFONTE, Pa. — Ted Benna was thinking about giving up retirement planning to become a full-time Quaker minister when he stumbled across something new buried deep within the federal tax code.
The change--a paragraph (k) added in 1978 to Section 401 of the Internal Revenue Code--was intended to clear up a tax issue over a corporate profit-sharing plan. But Benna saw a broader application: an avenue for converting after-tax savings plans into tax-deferred retirement accounts.
Thus was the humble beginning of the 401(k), which over the years has become a wildly popular savings program and a huge storehouse of national wealth. Some 48 million American workers now have 401(k) plans worth more than $1.3 trillion.
"I knew it would be big," said Benna, who now does retirement consulting from this central Pennsylvania town. "Of course, I stopped projecting in the billions--I never got to the trillions."
Benna remains a mover and shaker in the retirement-account world. He contributes regularly to publications and heads the 401(k) Assn., which promotes the retirement plans and lobbies Congress to oppose laws that would add more regulations.
He's also an open advocate of unrestricted employee choice in directing their 401(k)s, which he sees as a win-win situation--workers make their own investment decisions, and employers are relieved of legal exposure.
"It's your money," he said. "You should have the choice, the control, and the employer shouldn't be liable."
The 401(k) idea, as popular as it is now, didn't catch on right away.
Benna's first proposals were to a Philadelphia bank and a couple of insurance companies, but they fell flat. So he made a guinea pig out of the Johnson Cos., a suburban Philadelphia employee benefits company where he was a partner. He persuaded some of the company's workers to try his idea, and their first contributions were made in January 1981.
By adding a company match--not discussed in the tax code change--Benna thought he could encourage low-wage employees to participate. This was key, for under Section 401(k), the amount high-wage earners could put into their accounts was pegged to how much the lesser paid workers contributed.
Benna's invention has revolutionized personal finance, transforming participants from simple benefit recipients to active managers of their retirement plans. For many employees, their 401(k) is their largest asset.
"It has not only increased people's awareness of saving for retirement, I think it has changed their orientation," said Laurie Fleischman, vice president of marketing at Diversified Investment Advisers, a retirement consulting company based in Purchase, N.Y. "The typical employee now sees himself more as a consumer of [financial] information."
Much of that awareness, Benna says, stems from the evolution of the 401(k) plan itself.
Employees contribute pretax dollars, and most companies match at least a portion of the employee's contribution. Investment earnings are tax-deferred until retirement, and employees can take their 401(k) with them when they change jobs. They can also borrow from their accounts and repay the loan with interest, and funds may be withdrawn to pay uninsured medical bills and certain other hardship expenses.
For employers, a 401(k) program can help attract and keep workers, and can be a less costly alternative to a traditional pension plan, particularly for small companies.
In early plans, contributions were managed by the employer. Employees eventually were given the option of directing their investments into broadly defined categories, and now most can select from a variety of specific funds.
But employers still choose the funds offered to employees and the company that administrates the plan. That leaves employers open to lawsuits when they change plan administrators and open to criticism about limited choices for workers.
"No one mutual fund family does everything the best," said John Fletcher, who administered the first 401(k) plan for the Johnson Cos. and now is a consultant with Jamison, Pa.-based Plan Advisory Services.
"They may be good value managers, they may be good bond managers. One fund may be better in international funds, another in small caps. But I've never seen one fund family do everything great. So why not have the ability as a participant to pick the best of the best?"
Benna predicts that unrestricted choice is where the 401(k) is headed. In the next 10 years, he expects employers to get out of 401(k) administration altogether, giving employees complete choice over how to invest their funds.