'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?
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."
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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".
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.
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!!!
Words from an even bigger economic downturn:
The poet with his pen, the peasant with his plow;
It makes no difference who you are, it's all the same somehow.
The king upon his throne, the beggar at his feet;
The shopgirl, the actress, the woman on the street.
It's a life of smiles, and a life of tears,
A life of hope, and a life of fears;
A blinding torrent of rain, and a brilliant burst of sun;
A biting, tearing pain, and bubbling, sparkling fun.
So no matter what you have, don't envy those you meet --
It's all the same, it's in the game, the bitter and the sweet.
And if things don't look too cheerful, just show a little fight!
For every bit of darkness, there's a little bit of light;
For every bit of hatred, there's a little bit of love;
For every cloudy morning, there's a midnight moon...above.
from "The Bluebird of Happiness,"
written for and sung by Jan Peerce, 1936 and 1945
Happy Thanksgiving 2011! This country has gotten through worse times. We'll get through this.
I work in alternative investing in 401k's (i.e. Real Estate, Options) the problem with society and the 401k is everyone wants a quick fix. Any progress requires you to educate yourself and make choices- sometimes these choices don't pan out. I feel sympathy for all those who lost their retirement due to the stock market but that doesn't' mean these people are owed anything. People seem to have forgotten that all the Stock market (or most any type of investing) is, is just high stakes gambling!
In cases such as Enron where there was obvious illegality then yes- I believe you are entitled to your money back. Other than that make a conscious decisions with your 401k and be smart! FYI, my 401k based in the stock market lost 40% this year- I monitored it, took responsibility and moved my funds to a more lucrative investment instead of pointing the finger at someone else.
401K: The second biggest scam of the century! I did what every other normal hard working
American with little knowledge of the stock market did. I put money into my companies 401K, spread it around a little, some of it in safe portfolios and some in the risky ones, and guess what? It tanked and I lost 40% of what I had saved, while the people that got rich on Wall Street and caused the mess were handed billions of my tax dollars to bail them out. What a joke!!!
And, by the way, the biggest scam is gasoline prices. Once again, you can point your finger right at the Wall Street slime bags for that too. They manipulate prices through speculation, making billions on the backs of people just trying to get to work. The entire Stock Market is just a legal avenue for millionaires to steal your money one way or another.
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