The man who created the 401(k) says do this now

‘Father of the 401(k)’ Ted Benna joined Yahoo Finance’s Adam Shapiro on the latest episode of Yahoo Finance Presents to break down the history of savings plans and some ways improve 401(k) plans.

Video Transcript

ALEXIS CHRISTOFOROUS: Yahoo Finance's Adam Shapiro recently spoke with the father of the 401(k), Ted Benna, for the latest episode of "Yahoo Finance Presents," brought to you by T Rowe Price. They spoke about the history of the savings plan, alternatives to 401(k)s, and how to improve your plan.

ADAM SHAPIRO: Ted, it's good to have you here, and I'm curious-- first question, why do people refer to you as the father of the 401(k)?

TED BENNA: The reason for that-- well, first of all, Adam, I didn't put that label on me, OK? It was a publication. I think it was "Money" magazine, actually. And you know, I was a little hesitant in embracing it, actually. But the reason was I designed and put in place the first 0 savings plan.

ADAM SHAPIRO: So I want to talk to you about, as we talk about 401(k)s in the future-- there's this myth-- and you talk about it in your book, "401(k) 40 Years Later"-- there's a myth of what retirement was like prior to, say, 1977-78-- that everyone had a pension, that everyone became vested when they, in fact, did not in their long term savings plans or stock option plans through their companies. What is the myth? And what do we get wrong about it?

TED BENNA: There are a number of things about it. The first one is the fact that when you go back into the '70s, there was a less than 30% of the private workforce that recovered by pension plans-- less than 30%. And my first job was in home office of an insurance company that had one of those plans. And to become a participant, you have to be 30 if you were male, 35 if you were female, Adam, and you had to stay until you were age 60 before you had any vested benefit. I mean, that was pretty crappy-- wasn't anything wonderful about that.

ADAM SHAPIRO: And people would get fired or obviously leave their jobs a couple of years before vesting-- companies would do that to people.

TED BENNA: You had some companies, definitely, that were notorious for finding ways to move people out, you know, before they got to that point. That's true.

ADAM SHAPIRO: So the 401(k) plan comes about because of the tax revisions that take place in the '70s. And kind of the basis, I think, as you point out in the book where these stock option-- retirement tax deferred plans that people had prior to 401(k)s-- is that accurate?

TED BENNA: Yeah, they were known as cash deferred profit sharing plans. You know, that's the actual type of plan that this applied to.

ADAM SHAPIRO: So we get the 401(k) in the late '70s. You devised the plan that now we refer to you as the father of the 401(k). And at the end of your book, many years later, four decades-plus, you write, income adequacy will continue to be a major issue in the years ahead. In fact, every retirement system in existence will probably be severely tested. Does that include the current state of 401(k)s in your opinion?

TED BENNA: No question, Adam. It was never intended to be the primary vehicle for saving for retirement. It was only a page and a half long. It was a little fluky thing stuck in an end of year tax bill. But all of these plans are subject to the ups and downs of the stock market.

And it's very obvious 401(k)s. But what people who are in pension plans don't realize is they have the same financial risk, they just don't know it. They're not aware of it.

ADAM SHAPIRO: And with a 401(k), at least you have-- I don't want to say the illusion, because you actually do have some control over where that money goes. But if you were going to make recommendations to improve the 401(k) system today, what would you recommend?

TED BENNA: The first one would be the fact that there's a lot of criticism that too much of the money escapes out of the system when people change jobs. So the first one would be to put a lock on that and require that when you change jobs, your money has to continue to be invested for retirement-- you know, either in a 401(k) or IRA.

Another one would be to require that all employers who offer plans must use what's called automatic enrollment-- you know, that employees are automatically enrolled and their contributions are automatically increased each year. And the last one would be many people in retirement are going to have to make some really tough decisions about how to make this provide an income for their life-- for 20, 30 years.

And one way to do that is what is called a guaranteed monthly lifetime income annuity. And I would like to see a tax break for retirees-- maybe the first $1,000 to $2,000 a month that they lock in a guaranteed lifetime income annuity, they wouldn't have to pay tax on it.

ADAM SHAPIRO: Many years ago I read a story in which they talked about you, and I think they took a quote you might have said out of context. The headline was, father of four 401(k) calls it a nightmare. Do you want to set the record straight on that? Do you think 401(k)s are a nightmare?

TED BENNA: No, actually what I was talking about was the investment structure. You know, these plans evolved from being very simple. You know, the first plans, you only had two choices. And you decided in multiples of 25%. So it took less than a minute for me to explain investment options to participants, probably.

You know, they evolved over a period of time into something with many choices, making it extremely complex, you know, for employees to make decisions. And the cost of investing just got totally out of control. And so that's really what I was hitting on here when I said I would totally change if I were starting over.

ADAM SHAPIRO: I think the latest statistics indicate just 50% of the population today, the working population, has access to a 401(k) plan. And of that, only 50% actually fund it. What worries you or gives you confidence in those kinds of data?

TED BENNA: Well, I don't have confidence in them. Clearly, it's a problem. And it's one of the things I mentioned about improving it was to require that participants be automatically enrolled rather than having to decide to do that. You know, that would ratchet up the participation level for those who don't have plans. Now, the other problem is the fact that 40% don't even have the opportunity. And that ties into another change that I would like to see, and that is a mandate that all employers have to offer some form of payroll deduction savings arrangement to help their employees save for retirement.

ADAM SHAPIRO: I have to start wrapping up, but what would one example of the option for a smaller player other than a 401(k) plan be?

TED BENNA: Well, one is a payroll deduction IRA. And I've actually figured out two different ways of being able to do that and have a matching employer contribution similar to what you would get with a 401(k).

ADAM SHAPIRO: As we wrap up, if you were talking to someone between the age of 35 and 50, what would you tell them about 401(k)s, and with a positive spin? Is there something positive about it?

TED BENNA: What I've learned over the years is the most valuable part of the 401(k) is it turns spenders into savers by making saving the first priority. And most of us, including me at the time, would never have accumulated what you do with a 401(k) if you had to do it on your own every paycheck. And you know, not taking advantage of that opportunity if you have it, it's just crazy not to do that.

ADAM SHAPIRO: Any last comment you might have for all of us who are in 401(k)s or people entering the workforce who might get a 401(k)?

TED BENNA: Maybe the last one that jumps out at me is I'm concerned right now with all of the uncertainty around us that those who are approaching retirement, or maybe even in the early years of retirement, who are following traditional investment advice are taking a lot more risk than what they should be.

ADAM SHAPIRO: All right. Ted Benna, thank you very much.

ALEXIS CHRISTOFOROUS: All right, some news you can use there from the father of the 401(k).