Meet the Architect of the 401(k) Plan

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Ted Benna, a benefits consultant, is widely credited with creating the 401(k) plan most companies use today. While a provision added to the Internal Revenue Code in 1978 is the basis for 401(k) plans, it was initially used primarily by senior executives who wanted to supplement their pensions. Benna came up with the idea of using matching contributions to encourage contributions from lower-paid employees. More recently, Benna has developed an alternative savings plan for small employers that want to help their employees save for retirement but find traditional 401(k) plans costly and cumbersome to administer. Kiplinger’s talked to Benna, author of 401(k)s and IRAs for Dummies, about how 401(k)s can be improved and how savers can get the most from their plans.

What advice would you give to a young person who has the opportunity to enroll in a 401(k) plan for the first time? It’s never too early to start investing, even if it’s only 1% of your pay. Bump up your contribution as you advance and get pay increases. When people tell me they can’t afford to make contributions, I tell them, for one week, keep track of the spending decisions you make that are discretionary. Beverages, entertainment and so on. Once you do that and look at how much you’re spending, decide whether it would be smart to take some of those dollars, even if it’s only $20 a week, and put it in your 401(k).

You’ve been critical of the fees some 401(k) plan providers charge, particularly with respect to plans offered by small employers. How can employees monitor those fees and what should they do if they think they’re too high? Providers are now required to give employers information about their fees, and this information is supposed to be provided to employees before they put any money in the plan, so the first thing participants should do is get their hands on that information. Unfortunately, the more expensive providers aren’t very transparent. The owners of small businesses tend to get sold plans by someone they know and trust, and they buy whatever they’re offered. A local business with eight employees approached me a few years ago because they were unhappy with their 401(k) plan. I found out participants were paying a fee of 2.75% a year. I helped them switch to an IRA-based plan that reduced participants’ costs to 0.15% a year. That’s years of additional retirement income they’ll be able to get.

The SECURE Act, enacted in late 2019, made it easier for employers to offer annuities and other “lifetime income” options in their 401(k) plans. Is that a good idea? I’m not in favor of including annuities in 401(k) plans. My first job was as an actuarial grunt building those types of tables, and they’re loaded heavily in favor of the in­surance company. You’re overpaying for income in retirement and surrendering investment gains.  The only kind of annuity I’m in favor of is an immediate income annuity that provides monthly income after you retire. Retirees should invest a significant part of their retirement savings in something that provides guaranteed income because running out of money is a real risk issue for them.

Most 401(k) plans offer the ability to borrow from your plan, usually at a lower rate than other types of loans. Is that a good idea if you need the money? I’m not a fan of borrowing from your 401(k) plan because you end up getting double taxed. You have to repay the loan with money you’ve paid taxes on, and you pay tax when you take withdrawals. If you’ve got credit card debt and you’re paying 25% interest, you may want to consider it, but then you better cut up your credit cards and throw them away.

Employer-provided retirement-savings plans such as the 401(k) have replaced traditional pensions for millions of workers, yet a large percentage don’t participant in the plans, either because they don’t sign up or a plan isn’t available. What should be done to address this? I’ve been recommending for a number of years that any employer that offers a 401(k) plan should be required to automatically enroll participants and automatically increase contributions. Research shows that when employees are auto-enrolled, you get higher participation.

My other recommendation is to require small employers that don’t have a 401(k) plan to offer a savings plan for their employees that has payroll deduction and auto-enroll them as well. It doesn’t have to be a 401(k) plan, which is complicated to set up and administer for small numbers of employees. I’m working with a new entity that’s focusing on providing IRA-based programs for small employers that can be set up without any fees.