Ted Benna

Ted Benna

Founder, 401k Benna

Ted Benna may not be a household name, but his brainchild, the 401(k) plan, is a concept familiar to American families and practitioners in the financial advice community. Prior to Mr. Benna's establishing the first 401(k) plan in January 1981, no one had seen the likes of pretax retirement savings for employees. Up to that point, there were vehicles accommodating pretax employer matching contributions, but employees contributed after-tax money.

Mr. Benna, then a 40-year-old retirement benefits consultant, decided to pair pretax savings with employer matches at his then-employer, the Johnson Companies, sowing the seeds for the 401(k) revolution that's since taken the U.S., and other countries' retirement systems, by storm.

In the process, the Pennsylvania native changed retirement savings as we know it.

"There wasn't anything [in the law] saying you could do [this], but there also wasn't anything saying, ‘No, you cannot,'" Mr. Benna, 75, said. "So, I saw the possibilities."

The pension plan was the retirement vehicle du jour through the early 1980s, putting the responsibility for retirement investing squarely on the shoulders of employers.

Over the course of three-and-a-half decades, 401(k) plans have eclipsed pensions to become the de facto retirement savings vehicle for the private sector, spawning a mass savings method that provides everyday Americans with an ability to personally save for their retirement.

"I think he made a major difference in helping to develop the modern 401(k)," Mark Iwry, a former deputy assistant secretary for retirement and health policy at the Treasury Department, said about Mr. Benna.

In fact, Mr. Benna is widely known as the "Father of the 401(k)."

"The precursors of the 401(k) were generally focused more on the executive level of the workforce than on the rank and file. Mr. Benna was instrumental in putting together the right combination of elements to make the 401(k) a much more broad-based, powerful savings vehicle that could be, and was, taken to scale," Mr. Iwry said.

There are now more than 60 million active 401(k) savers in 500,000 plans, holding roughly $5 trillion, according to statistics from the Department of Labor. Defined-benefit plans have fallen in lockstep with the ascent of the 401(k) — the number of DB plans peaked in 1983, at 175,000, and has declined steadily to below 45,000 today.

David John, a senior adviser in AARP's Public Policy Institute, said Mr. Benna's innovation hit at the right time. There were substantially higher tax rates in the early ‘80s — the top marginal rate was 70% — and a variety of "economic and management decisions" that were causing the pension system to "spiral out of control."

"There was a need for something else, and he just happened to step forward with a solution," he said.

That solution also has had a profound impact on other countries, such as the U.K., Australia and New Zealand, which share elements of the 401(k) and the U.S. retirement system, and has sparked interest in similar types of long-term savings plans such as 529 college education plans, said Mr. John, who also is deputy director for the Retirement Security Project at The Brookings Institution.

The 401(k) plan has provided for widespread access to mutual funds and the investment diversification they offer. In 1980, 5.7% of U.S. households, about 4.6 million families, owned mutual funds totaling $135 billion. Today, 44% of households, about 55 million families, have mutual funds holding more than $16 trillion.

"Clearly, the 401(k) has made the mutual fund industry what it is today," said Mr. Benna, now a consultant at an eponymous firm. "Prior to that, it was a mom-and-pop type industry."

Section 401(k) was originally added to the Internal Revenue Code in 1978, but was little noticed. By 1980, Mr. Benna was busy designing a program fitting its parameters. He first pitched the idea to a pension-plan client, a bank in Philadelphia, but the bank said no because it didn't want to pioneer a brand new concept.

So, Mr. Benna decided to give it a go at the firm he co-founded, Johnson Benna Co., and its sister company, Johnson Kendall Johnson. Some of the original participants are still in this first 401(k).

Nowadays, the Father of the 401(k), ironically, has moved on from 401(k) plans, consulting with small employers on setting up non-401(k) retirement plans, such as variations of payroll-deduction IRAs, which are simpler and less expensive than the traditional 401(k), Mr. Benna said.

If there's one thing he laments about his creation, it's that 401(k) plans have become convoluted for employees.

The first plans had two investments and limited options for how to allocate contributions, and the employer paid the fees, with the exception of the investment-management fee, Mr. Benna said.

Today, plans that have 15 to 20 investments are common, the potential number of portfolio options extends to the thousands, and several costs are passed on to the participants.

"He has facilitated the creation of the system, and that's a good thing," Mr. John said. "But it's not a finished product."

– Greg Iacurci


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