The 401(K) Myth

As most senior citizens know, the 401(K) plan is the primary retirement savings vehicle used by most Americans. However, it was never intended to be. The 401(K) plan was the brain child of a benefits consultant named Ted Benna. Ted noticed that the rules of the Revenue Act of 1978 allowed for employers to establish tax advantaged savings acconts for their employees.

Ted petitioned the IRS to modify section 401(K) of the IRS code in 1981, and they complied. This tax-loophole search was the birth of today’s modern 401(K) plan. With corporate America wanting to get out of the pension plan business because of the fiduciary liability and the requirement to keep pension plans fully funded, they replaced pension plans with 401(K) plans. The change was a financial windfall for the mutual fund industry and Wall Street.

The federal government tried to eliminate the 401(K) plan in the 1980’s but was unsuccessful because of the powerful Wall Street and financial indursty lobby. As a result, the average American was left to make critical financial retirement decisions themselves like sheep thrown to the wolves.

Wall Street and the mutual fund induary has since enjoyed a financil windfall from high fees and expenses associated with the funds inside these plans and the typical American has suffered, left to the lack of mercy of the stock market with no alternative means offered to them by the system.

There are better alternatives to plan for retirement than the 401(K), but they are not offered by most companies, especially to the rank and file employee. As a result, many of the 10,000 baby boomers retiring each day will not have a meaningful retirement.

Additionally because of a lack of financial knowledge many Americans retire and do not qualify for benefits, they have paid for all their working life from taxes withheld from their paychecks.

With no other vehicle offered to plan for retirement, Americans are literally gambling their retirement savings with 401(K) plans. As a result, instead of working to live the American dream and have a meaningful retirement, they end up living the American nightmare, not enough money or worse running out of money in retirement.

Just as there should be a pathway to citizenship for immigrants in America, there should be a guaranteed pathway to a meaningful retirement after a lifetime of being a good citizen, paying taxes, and working hard. Wall Street and the mutual fund industry continues to raid the savings of the American worker through 401(K) plans and the remaining pension plans in many cases aren’t much better.