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'Father of 401k' disowns it

The man credited with creating the employee retirement savings plan evaluates the concept 30 years later. Would he do it again?

By MSN Money Partner Nov 23, 2011 3:28PM
This post comes from Jeremy Olshan at partner siteSmartMoney.


Ted Benna, who three decades ago seized on an IRS loophole to transform American retirement savings, says he's proud to be "father of the 401k." He also thinks he created a monster.


The plans, which he intended to be as simple for employees as pensions, now offer too many investing options and too many opportunities to make mistakes, he says. "I would blow up the system and restart with something totally different," he told SmartMoney. "Blowing up the existing structures is the only way we can simplify them."


In 1978, when Congress passed the section of IRS code for which the plans are named, lawmakers aimed to limit the scope of cash-deferred plans being offered by some companies, but had no intent to revolutionize retirement. Benna, then the co-owner of the Johnson Companies, a benefits consultancy in suburban Philadelphia, was developing such a plan for a bank client when he happened on the idea that section 401k could allow an entirely new option.


The original 401k plans "could be explained to employees in just a minute," Benna, now 69 and semiretired himself, says. "There were two options, a guaranteed fund and an equity fund," he says. "With the guaranteed investment fund, we'd tell them this is what you will have when you retire. With the equity fund -- which was usually something like the Fidelity Magellan fund -- we'd say, you might have more, but you might have less. Most people would split their contributions 50-50 between the two."


Plans became too complicated

As the plans were embraced by employers and financial institutions, Benna says 401k's were made so complex one needed to be an investing pro to make sense of them. "Now this monster is out of control. We went to three options, then to six, then to seven, then to 15 -- it is far beyond what most participants were able to deal with," Benna says. "And I am not convinced we have added value by getting more complicated."


Better education was supposed to be the solution to intricacies of the plans, Benna says. If employees understood the options, the power of compound interest and dollar-cost averaging, and the advantages of making pretax contributions, it was believed they would do the right thing. "We're throwing tons of money away trying to teach participants how to become skilled investors -- we said, we are going to make people smart and savvy enough to make the right investment decisions, but it just hasn't worked." Post continues below.

Benna blames the newfound complexity on what he says was the small percentage of employees who wanted it. "What triggered this whole mess is that some of the more sophisticated participants were a pain in the butt," he says. "You'd have these troublemaker loudmouths push human resources, and say, 'Why don't we have this "flavor of the month" fund?'" These sophisticated employees are also the ones taking advantage of the education and advice being offered, he says.


Overwhelmed, employees made mistakes

The consequence of all the complexity is twofold, he says. First, employees felt they could be more active investors. "There is too strong a potential for employees to do the worst thing ever, which is moving in the wrong direction, panicking when things are bad and cashing out after they have been battered." Secondly, the current plans induce "a kind of gridlock -- employees get so overwhelmed they do not participate -- they do nothing," he says.


Education didn't work to stop employees from sabotaging their own futures, he contends, but legislation might. "We need a legislative mandate that when you change jobs, the money needs to be retained in a retirement account -- there cannot be an option of 'here's a check, you decide,'" Benna says. He also advocates mandating all employees be auto-enrolled in the plans, and that their contributions be automatically increased one percentage point per year to a maximum of 10% to 15%.


Despite these misgivings, Benna insists the plans are benefiting millions of employees. He gets rankled whenever someone suggests the workforce would be better off had the 401k never been born, noting that the pension system was more fraught that many remember. "I am not anti-defined-benefit plan -- in fact I sold them for decades -- they are great, but only for those who stay with the same company for 20 or 30 years."


More on SmartMoney and MSN Money:

Nov 23, 2011 7:12PM

There are 70 people who have given this a THUMBS UP and 5 a THUMBS DOWN.  This is all factual information.  Who are these 5 uninformed people?  I will bet you none of these people prepare their own tax return as I do; or know the laws about retirement accounts as I do.  I challange them to respond!


I went to work out of college in 1973 for a company that had what they described as a (Cadillac Pension).  In 1990, the company decided to dissolve the plan and go to a 401K.  For my 17 years of accrued benefits, I received $15,836 which I rolled over into the new 401K plan.   I was 39 and therefore received this small paltry sum, as the older people ended up with the bulk of the money.   The company kept over $500K of money in the plan and did not distribute it to the employees.  Instead the money was shown as income that year to falsify the real earnings of the company. 


I contributed every year the IRA was available starting in 1975 when you could put in a maximum of $1,500 per year. 


The Tax Reform Act of 1986,  changed the deductibility of an IRA  if you were a participant in  a defined benefit plan.  You could not deduct a traditional IRA before tax but after tax if you were single and earned more than $35K and $50K for married a year.  The problem with this scenario was it was assumed you would be at your employer for a long period of time and have this defined benefit "Pension" at retirement.  From 1987 until this law was revamped I did not contribute to an IRA because it was not deductible.  Roth IRA's were started in 1998 and I then started putting money in Roth IRAs.


The problem was the assumption by our legislators that if you were in a defined benefit plan (Pension), you would receive this monthly income.  Corporate America took this benefit away and now give this money to Corporate Heads in big salaries, stock options and grants and bonuses.


This was the greatest "RIP OFF" allowed by the Washington, D.C. Politian.  Of course they still have their lavish pension that allows them to draw $55K per year after 20 years of service at age 55.  This needs to change to a 401K.  They would then be in the same boat the rest of us are in with the market swings!

Nov 24, 2011 11:29AM
No one has ever got rich off the government.


Tell that to Lockheed Martin , Daimler Chrysler, Boeing and of course the winner of all the no bid contracts for rebuilding Iraq , Halliburton. Not to mention GE , Bank of America and Verizon who not only paid no taxes last year, but got millions back from the government. I'd say getting millions in subsidies qualifies as "rich".

Nov 24, 2011 9:23AM
The sad thing is not about whether 401ks are good or bad. The sad thing is that many people in this country have no plan for their own retirement other than SS which was never meant to be a total retirement package. Why is it that everyone have money to buy a cell phone, car, home, education, alarm system, I Pad, wifi, internet connection, eat out every other day, go on vacation twice a year, have a laptop, etc....but they don't have time or the money to plan their retirement. This is not a political issue (it's not the demos or repubs faults). This is the people's problem and until the people get their own house in order, stop complaining about everything and everyone else.
Nov 23, 2011 6:34PM
I started investing in my current 401k in 2001 at age 26.  Since then I've accumulated right at $200,000 of which only $115,000 was contributed by me, $47,000 was added as a match by my employer, and I've earned around $38,000 of gains during one of the worst if not the worst decade to be in the market.  I've done very little in terms of managing the account, maybe making some changes only 4 or 5 times in the last 10 years (but never selling after the market had already tanked).  To everyone complaining the 401k is a rip-off where else could I have almost doubled my money in the last 10 years by doing virtually nothing?  Obviously my employer match has been a big boost but it's still a part of the 401k system that can't be discounted.
Nov 24, 2011 9:24AM
here's one, my brother died a few years back, left me his 401, I called them and stated "just leave it in there and i'll get it when i retire.  Nope they wouldn't do it, they told me i had to close the account, so I did, then they charged me a great deal of money for closing the account early.  I stated i didn't close it voluntary, he died.  to make a long story short, got screwed.  You just can't trust anybody now a days.  If it's hidden away in your mattress and you get robbed at least you have a chance of killing the person who's trying to take it away from you.  Now all you get is and unanswered phone call.
Nov 23, 2011 6:59PM
Ah, someone, your contribution calculations are off.  For a starter, you are assuming that everyone's company matches at the max rate.  Many don't match that high.  In fact, quite a number don't match at all.
Nov 23, 2011 7:03PM

401K retirement plans: great idea, lousy execution.


The benefit of these things is totally dependent on the quality of the person who sets up the plan.  I just received my quarterly statement; I would have done better just throwing all my contributions in the trash, and my money was in funds that had the best returns of all my options.  Our plan doesn't even have a cash-value option (simple savings).

Nov 23, 2011 5:40PM
I have been in and out of the "market" for over 40 years. Just like casinos, the "house" always win. Privatizing Social Security and forcing privatized 401k,s only results on the wall street group (the House) making money off your money as you,lose all hopes for a future.
No 401k works on behalf of the investor. Maybe because too many mistakes can be made, maybe because that is how the wall street boys want it to be.
Nov 24, 2011 10:30AM
The biggest shortcoming of 401ks in my opinion is you're stuck with your plan's investment options and fees until you leave that job. Why do they get to decide what investment options are best for me? It's my money!
The right fix for 401k plans is to allow the employee once a year to do a full or partial rollover to a self-directed IRA!!!

Nov 24, 2011 12:02PM

The real problem is never mentioned in this article.  A 401k plan alone will never fund an indiviuals retirement.  Very few people have ever made enough money in a 401k plan to actually retire on a 401k plan alone.  The average employee, over a 30 year career, has 200,000 dollars in their 401k plan.  Thats using numbers from history.  With the stock market hits of the past decade I'd say most 401k plans are less than 200,000 over a 30 year career.  So the real crime is that Ted Benna's 401k plan was sold to workers as their savior and companies got rid of their defined benefit pension plans.  Today workers now realize that if all they have is a 401k plan then they will never retire.  However it's late in the game.  Companies have taken away defined pensions, the only real retirement plan, and workers now realize they will likely never retire.  At best a 401k plan supplements a defined pension.  It should have never been seen as or implemented as a replacement for a defined pension.  The American dream is dead!  The Idea of putting in a good 20, or 30 years of hard work and having it rewarded with a modest retirement is dead!  The dream of owning your own home, free and clear of a mortgage, is dead!  Politicians on the right want to destroy retirements further but in fact retirements started being destroyed decades ago.  What we have seen over the years and are seeing today is the killing of the american dream.  It's a good title for a book:  The Killing Of The American Dream!.  Good Day, Joe.

The only decent pensions are the defined benefit plans, which provide retirees with a guaranteed income the rest of their  lives.  All these other so-called pension plans 401K's, IRA's, Keough's, etc. are no more than savings plans that end up being gambled away in the stock market most of the time.
Nov 23, 2011 7:48PM
Does anyone who works at a place which offers a 401k talk to fellow employees about how they have their funds allocated?  I had a 401k for a couple of decades at two different employers.  Seemed to me that not very many people understood the whole concept of allocating money and simply followed whatever the advisor said.  That is how alot of people lost their retirement.  To be in charge of funds like that requires some understanding of how the financial system works, and how it advisors work.  I would dare to say that most baby boomers don't have that.  Hopefully the younger generations get a better education .
Nov 24, 2011 11:13AM
Strange, how easy it is for most of you to blame average people for not being sophisticated enough to understand the machinations of these "retirement plans". As with anything, it is over complictaed by those seeking to profit from them, even though they contribute nothing. It is the over all GREED in our society that gives these souless, heartless individuals cover for taking advantage of the system they helped to create at the expense of "average" working people.
Nov 24, 2011 10:36AM

People will never get their house in order.  Young people don't think they need healthcare then it's to late.  People want more so they take risk, then it's to late.  People say it's not my fault that other people don't have their house in order,  but then the economy falls apart because people didn't have their house in order, then it's to late.  Wake up people you are your brother keeper because if you are not the house will fall in on you, then it's to late.  Let the government do its job and oversee unfair practice and provide security for all, not promote  con men that prey on the innocent and naive, so it will not be to late.  Get rid of bums in congress and elect people that believe in government and work to make it work.

Nov 23, 2011 6:47PM
The sad part about the 401k is that far to many people will loose a substantial part of their retirement income, in their golden years .. which amounts to being short changed on the pay you worked for .. when you could work.  Slave from crib to grave .. and ripped off along the way.Angry
Nov 23, 2011 9:56PM

The only way to be sure you will have money when you retire is to be in total control of the money throughout your life. If everyone set aside 10% of his after tax paycheck in his retirement kitty, he would end up with plenty of money when he retired. Anyone can live on 90% of a paycheck. Defined benefit plans can go up in smoke when the company does. Roth's, 401-k's, etc. force you to deal with the standard investing vehicles. If you truly own and control the money, you can buy anything you, gold, diamonds, stocks, bonds, art, part of a private business, start your own business. etc.. Sure there are risks, but the one risk you do not have is that someone else will screw up the process for you. If you dream like Socialists and think that there is some rich company, government, or union out there who will support you in grand style, good luck. You are watching daily what that grand hope brings the world. The only person who cares about you is you. Get in total control.

Nov 24, 2011 10:14AM
i am proud to say that i seen thru the 401k when it was first introduced. i told my wife that we should take our money and put it into something that we have total control over. we bought real estate and other investments where the government does not have control over your money. we did real well and now are retired in florida. my wife still works and has contact with many older retirement age people. i have not heard a good story yet about some one who did well on a 401k. everyday my wife says there are people in the condo that are down to there last dollar and going to loose everything. these are people who thought they had enough money to live and now are really destitute. never trust anything the government has its hands in. 401k is just socialized gambling and it is tied to your politicians beware don't look for things to get any better until our political clowns are all removed from office. believe me when i say they are not in your best interest.
Nov 24, 2011 11:21AM
Yes, lots of people have gotten rich off the government. Those that are in a position to manipulate the laws and "rules" they pass. Haliburton has made billions, Exxon has done quite well, so have those in congress that represent the monied interests above the vast majority of citizens. This is the conservative Fascism they have created. We must end it. 
Nov 23, 2011 7:19PM

Every week couple billion dollars from 401k accounts feed into stock markets. Move these monies around from one joint to another to get commission alone giving these bankers plenty of bonus each year. We have many billionairs  and millionairs today because of that steady stream of monies are coming in regularly and predictably.


If you want to take advantage of this 401k think like bankers or traders do. Contribute to Roth IRA first. Max that out. That's only money that will make you rich.  But you have to trade regularly...riding the wave of stock market up and down. Stock market is not an investment. You don't buy a stock and sit back and sell it when you about to retire. It is a gambling house but the outcome is better than a casino if you follow news and read what these traders are doing.


The 401k if you chose to contribute put it all in bond fund. Bonds are much stable for something you can not move in and out quickly. It will give you benefit of tax deduction and company match if they match yours.


If everybody do this with their 401k account no way that bankers and financial institutions can pick our pockets so deeply.


Nov 23, 2011 5:50PM

Many folks seem to think that pensions are better than 401K’s and that isn’t entirely true.  When pensions were at their peak only about 20% of retirees ever received payouts from a pension plan because most did not work at any one job long enough to qualify for the benefit.

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