The 401(K) Giveth and Taketh away

Ted Benna: The 401(K) Giveth and Taketh away

By all accounts Ted Benna should be heralded as an American hero. But I’m willing to bet most of you have never heard the name. Ted is credited as being the guy who created a financial tool that reformed personal finance throughout the last three decades and made more Americans members of the stock investing society than any other financial tool ever created.

However, Ted is rather ho hum about his creation these days. Noting that it’s largely an unwieldy beast that has taken a form he never intended, and the only way to fix it—in his eyes—is to blow it up and start over again with something completely different.

And what was it that Mr. Benna created that has veered so hopelessly off track that it cannot be repaired?

The ‘K’ we added in 1978

The year was 1978. A young man who grew up on a dairy farm in Pennsylvania was working as a “pension consultant” (yeah back then we had even more ridiculous names for ourselves) was being pressed by business owner clients to come up with ever more enterprising ways to net the largest tax breaks to Mr. Business owner all the while committing him to the lowest out of pocket expense to offering benefits to his employees (the more things change, the more they stay the same).

It was during this year that this young pensions consultant’s and every major business owner’s dreams came true. The 95th Congress added a paragraph to IRC section 401, a paragraph labeled ‘k.’ This new section to IRC 401 caught our young pension consultant’s attention and stipulated the mechanism that needed to be in place in order to create a employer savings plan that was largely discretionary but offered significant tax deductions, which offered substantial tax savings (keep in mind that back then the top marginal income tax rate was 70%).

And it didn’t take long before a star was born. Ted Benna, our young pension consultant, helped lay the groundwork for what we now refer to as the 401(k) plan.

30 Years in Review, your Creator is…not all that Impressed

This isn’t really breaking news, as Ted Benna has been interviewed a few times in recent years about the 401(k) plan, and his views on the plan and its implementation haven’t changed much in that time. He’s not a fan.

Benna’s biggest contention is with the over-complication that numerous fund options bring to the table, coupled with the fact that he never envisioned the plan’s taking over and essentially replacing pension plans—as we’ve mentioned numerous times, that was never the original intention.

In Benna’s opinion, we’ve spent way too much time and money trying to turn Joe Q-Public into a sophisticated investor, made necessary by the complex array of options now available in your standard 401(k) plan. The original idea was to make a savings plan available that had significant tax deductibility all the while keeping the actual “investment” simple. The focus was on the tax deduction and not the investing, and it’s here that I would contend failure was inevitable.

A Tax Deduction just to get a Tax Deduction

While I’ll admit there’s a lot of mileage one can get out of convincing someone they need to do something simply to get a tax deduction (that’s how the majority of traditional IRA’s and mortgage refi’s have been pushed for years). But eventually someone will start to do the math and realize that it’s not always worth it (and those smart people are our clients…sorry couldn’t help it).

I’m not trying to suggest that no one benefits from the tax deduction made available by 401(k) plans. What I am saying is that the benefit is largely overstated (as are most tax deduction schemes). When you take a tax deduction in a 401(k) plan, all you really do is kick the ball down the field regarding when you’re going to pay the taxes, and the Treasury is okay with this notion, since it takes not only the money it would have had you paid the taxes when the income was earned, but part of the gain (assuming there is gain) in the investments. And if the money pours out of the 410(k) plan in too fast a fashion then the Treasury gets even more.

Human Nature…we should have Seen this Coming

While Ted Benna is, at the very least, proud that he got to be at the forefront of a paradigm shifting financial mechanism, it’s a tad difficult to believe that no one could have predicted the eventual implementation of what we now know as the standard 401(k) plan.

For the most part, human nature hasn’t changed since our inception. More for me is always good. And the 401(k) acted as a means to accomplish a sort of utility maximization that any Micro Econ 101 student ought to be able to pick up on.

Further to assume Wall St didn’t look at the inception of the 401(k) as the greatest opportunity to expand it’s products to every American, is nothing short of foolish. There are some who like to suggest that big pharma will not rest until every American has been diagnosed with at least one disease for which a prescription is necessary. I’d offer up the notion that Wall St would much prefer that every American have a 401(k), or at least an IRA funded with stocks and bonds.

Should we Blow it up and Start Over?

The media has often asked if we should rehash the 401(k). Of course, a lot of that discussion has subsided since we’ve seen a pretty good run up in the market over the course of the last five years. Give us just one significant dip and you’d better believe they’ll be all over it again. We’ve long thought the answer is yes. But of course, we also question the prudence behind a retirement planning axiom that accepts stocks as a primary method to accumulate wealth. At one time they were considered too speculative for that purpose. My how times have changed?

But when the guy who largely put the whole idea together in the first place says it’s time to forsake this 30 year old experiment in favor of something else, it’s probably not a bad idea to at least not take any advice to wholesale place money into the plan at face value. Of course, only the people who will question the validity of such simplistic advice will likely avoid the trap so many American find themselves in. And, again, we call those people are clients. 😉

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.

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