Ted Benna immediately knew he had discovered something of value when he finished reviewing the IRS regulations that fateful weekend in 1980. And, although the client he was doing the analysis for rejected the idea, his own firm, The Johnson Companies, didn't and the first 401(k) savings plan with matching employer contributions and employee deferrals became effective January 1, 1981.
Thus began one of the greatest real-life “they laughed when I sat down at the piano” moments. And like the famous and oft-repeated 1926 ad by John Caples, the concept of the 401(k) not only had staying power, but it has proven to be quite successful in its intended purpose.
How strong is the concept? Benna's simple idea has been repeated 640,000 times since he convinced his company to start the first 401(k) plan. How successful is the concept? The 401(k) has allowed 60 million employees to accumulate more than $7.8 trillion in assets.
It's tough to argue with that kind of proven and consistent success. Yet, there are those who insist on inventing a better mouse trap. And when you consider that particular metaphor and the specific alternative being proposed, the emphasis should be on the word “trap.”
We’re seeing two competing alternatives to the 401(k). One is the return of the pension plan. The pension concept is being viewed through rose colored spectacles. Benna used to sell pension plans. He says, “There is a widely held perception that we once had a wonderful retirement system where all employees received a pension.”
The reality, says Benna, is that “only roughly 30 percent of the private work force were covered by pension plans when the 401(k) hit the market.”
The numbers just don't add up for the pension plan.
The second alternative — state-sponsored retirement plans for private employees — is at once both more seductive and blatantly foolish. This initiative accelerated in the waning months of the Obama administration. Ironically, the states leading the effort have a poor record handling their own public employee retirement plans.
A recent study by the Center for Retirement Research says Illinois is the state most at risk when it comes to its public employee retirement plan. In terms of the worst municipal retirement plans, California features 6 out of the 7 worst cities (the seventh is in, you guessed it, Illinois). Who are the two states leading this state-run private employee retirement plans? Yep, California and Illinois.
Paul Schott Stevens of the Investment Company Institute says state and municipal governments’ retirement plans “face a collective $3 trillion shortfall.” If the numbers don't add up regarding the return to the pension plan, they’re downright crazy when one considers the notion to allow individual states to operate retirement plans.
This isn't what makes state-run private employee retirement plans a trap. What makes it a trap is this: Employees who place their hard-earned savings in a state-sponsored retirement plan lose their ERISA protection. That's why private employees need to avoid them like they avoid an April Fools’ prank.