Ted Benna, father of the 401(k), thinks tax reform that favors Roths is 'pretty stupid'

Ted Benna, widely known as the father of the 401(k) plan, believes an idea being debated in Washington to lessen the pre-tax contributions workers can make to a retirement plan is "pretty stupid." Mr. Benna was a pioneer of the 401(k) plan, having developed the concept of pre-tax 401(k) deferrals. He adopted the first-ever 401(k) savings plan in 1981 for the Johnson Companies, where he worked as a retirement benefit consultant. Now, debate is swirling on Capitol Hill to reduce the pre-tax contribution limit from the current $18,000 annual limit as part of a Republican tax-reform package set to be unveiled this week. Any contributions beyond the pre-tax limit would be mandated to go to Roth, or after-tax, accounts, a policy known as "Rothification." "I think it's pretty stupid in terms of retirement policy," Mr. Benna, now a consultant at an eponymous firm, told InvestmentNews. "There's major concern about a retirement crisis that's staring us in the face. [The 401(k) plan] is the plan, whether people like it or hate it, that's the primary way for the average American to be saving for retirement." The issue has generated fierce debate on its merits, fueled last week by the public spat between President Donald J. Trump and Rep. Kevin Brady, chairman of the House Ways and Means Committee. Mr. Trump said on Twitter that there would be "NO change to your 401(k)," calling them a "great and popular" tax break for the middle class. Mr. Brady signaled that proposals to limit the 401(k) tax break were on the table. While details are scant on the final form of any proposed tax legislation, reports have indicated a pre-tax contribution threshold of $2,400. Because Roth accounts, in which individuals pay taxes now instead of at retirement, accelerate 401(k) tax revenues inside the 10-year window officials use to judge the monetary impact of tax legislation, it's broadly seen as a way to offset some of the revenue that will be lost to Republicans' desired corporate and individual tax cuts. Mr. Benna, like many other opponents of such an idea, contend the upfront traditional 401(k) tax break provides a large benefit to middle-income Americans, who would likely save less as a result of a shift to Roth accounts. He also argued the middle class carries a greater burden relative to lower-income earners to replace their income in retirement, and therefore the upfront tax break is reasonable. Social Security, for example, doesn't replace as much of a middle-income worker's pre-retirement income, on a percentage basis, as a lower-income worker, he said. In other words, the middle class needs to save more money on a percentage basis to get to a level like 70% income replacement in retirement, a widely cited level of retirement preparedness. "They have a bigger gap, which is why it's reasonable giving the tax break, to help them get there," Mr. Benna said. "They have more of a burden to get to an adequate standard of living." Some observers, such as renowned behavioral economist Richard Thaler, have taken a contrary position: that a reduction in the pre-tax limit would mostly affect the wealthy, not middle America. "Unpopular observation: reducing the limit on 401k contributions is massively progressive," Mr. Thaler, the recipient of this year's Nobel Prize in Economics, said Oct. 25 on Twitter.

Unpopular observation: reducing the limit on 401k contributions is massively progressive. https://t.co/zw2EypB2cC

— Richard H Thaler (@R_Thaler) October 26, 2017

Mr. Thaler has had an enormous impact on retirement savings, through concepts such as "nudging" employees to join retirement plans via automatic enrollment. In a follow-up tweet, he equated the current pre-tax savings structure to a "tax shelter" for the rich, which allows them to save more money and earn a bigger tax subsidy from the government. "Very few max out," he tweeted.