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Chapter 6: Qualified Plans

I need to provide a brief history on the 401(k) because most people don’t

understand that it was never meant to be a primary retirement vehicle.

Back in 1978, section 401(k) of the Internal Revenue Code was a tax-

deferred arrangement for contributions with annual limitations. It was a

great opportunity for company executives to contribute extra money to a

tax-deferred plan.

By 1980, this small section in the Internal Revenue Code spilled over to the

average worker to allow him or her to also contribute on a tax-deferred

basis.

Before long, employers started to realize it was much cheaper to offer

401(k) plans that included matching funds rather than to fund pension

plans. Many employers shifted the responsibility of funding a lifetime

pension to moving all the responsibility to the employee in the form of a

401(k). As a result, many employers eliminated pension plans altogether.

Wall Street saw this as a great opportunity to offer their mutual funds for

employers to include in their plans (for a modest fee of course). Thus, the

greatest beneficiary of the 401(k) appears to be Wall Street and the mutual

funds. I talk to people all the time who tell me that when they were hired the
Human Resources specialist shoved a bunch of forms in front them to sign.

Enrollment in the 401(k) was almost automatic. In general, an employee is
provided a list of mutual funds from which to choose: small cap stocks,

large cap stocks, bonds, and international stocks.