Page 5 - The Great 401k Rip-Off

Smith revealed in his report that 401(k)s began as a piece of obscure special‐interest legislation—an
arcane paragraph in the 1978 Federal Tax Code designed to create a tax shelter for Kodak and Xerox
executives. How arcane? Just look at the name: Item “k” in Section 401 of the tax code. Almost
invisible and certainly not meant to become the most important and destructive piece of economic,
investment and retirement legislation of the century! [9]

That, however, is exactly what happened, when, due to corporate pressure, IRS ruled in 1981 that
savings from regular workers could also qualify under the 401(k) tax shelter. Later, a planner by the
name of Ted Benna discovered the 401(k) clause in the tax code. He reasoned that if employers
would match employee contributions and it could all be tax‐deferred, he could set up a lot of them.
He lobbied the Reagan Administration, which at the time was involved with establishing the
guidelines on IRAs and other qualified plans, and thus of a mind to take it on. Several companies,
FMC, PepsiCo, JC Penney, Honeywell, Hughes Aircraft Company, and others developed 401(k) plan
proposals, many of which officially began operation in January 1982 [6]. That opened the floodgates
to the modern 401(k) and the rest is history.

The employer match did its job and many employees were convinced to contribute to their 401(k)
plans by their employers and plan brokers. This would have been fine, had these qualified savings
accounts remained a supplement to other, more traditional retirement programs. However,
employers found they were able to match employee contributions and dramatically reduce their
retirement plan costs and liabilities, by doing away with pensions and replacing them with defined
contribution (DC) plans. What got lost in the all the talk about “empowering” the small investor—and
electrifying Wall Street with trillions of dollars of new money—was the enormous shift in who was
now paying for retirement, and more importantly, bearing all the risk. Corporations, said Smith,
quickly realized that the 401(k) would save billions of dollars by shifting all the responsibility – and
risk – of retirement funding from employers to employees. [8]

In 1978, according to Smith, workers put in only 11% of total contributions to retirement plans while
corporations put in 89%. By 2000, the employee share had jumped way up to 51% ‐ and the company
share had fallen to 49%. That’s a cost savings of 40% for companies. So who needed pensions? [10]

Wall Street is just fine with it

Another thing brought to light by the Frontline report: most of us are not very good investors! Really
understanding stocks and bonds and other investments doesn’t come easy to most people [8]. These
are highly technical areas. How is the average CNC operator, nurse, school‐teacher, bus driver, short
order cook, middle manager, construction worker, fire fighter, or x‐ray tech supposed to understand
all of the ins and outs of the markets? For that matter, what about the company president or even an
accountant? As an entrepreneur and business owner with an advanced degree in finance, I
completely mismanaged my own retirement plan (that was BEFORE I got into this business and
learned how easy success is!). How is one with no financial background supposed to do it in the face
of a multi‐billion dollar industry that is firmly rooted in the status quo?

Exacerbating the problem is how imbalanced the market is for individual investors. For markets to
really work they must be open and symmetric and the financial markets are anything but [10]. In
years past, when big pension plans and unions and companies themselves controlled most of the
investing, they were much more balanced. There were only about 20 million shareholders and

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