PLANSPONSOR - October/November 2018 - 4

Insights
Milestone Reflections
T
he 401(k) is 40 years old this month-kind of. Included in the United States Revenue Act
of 1978, which was passed by the 95th Congress and signed into law by President Jimmy
Carter on November 6, 1978, was a provision that added Section 401(k) to the Internal
Revenue Code (IRC). That section stated that employees would not be taxed on the portion of
income they elected to defer.
The Revenue Act of 1978 also added permanent provisions to the IRC, sanctioning the use of
salary reductions as a source of plan contributions. The law went into effect on January 1, 1980,
and, in November 1981, the IRS issued the regulations that allowed for employee contributions to
401(k) plans through salary deduction arrangements.
According to the Employee Benefit Research Institute (EBRI) in its " History of 401(k)
Plans: An Update, " soon after the regulation was signed, even before it went into effect, companies
including Johnson & Johnson, FMC, PepsiCo, JC Penney, Honeywell, Savannah Foods &
Industries and Hughes Aircraft Co. were examining these new plan opportunities. Many of them
went on to develop 401(k) plans, which officially began operation in 1982.
It has often been said that 401(k) plans replaced defined benefit (DB) plans. Yet, when the
new option first came into effect, " many employers replaced older, after-tax thrift plans with
401(k)s and added 401(k) options to profit-sharing and stock bonus plans, " EBRI wrote. " Within
two years, surveys showed that nearly half of all large firms were either already offering a 401(k)
plan or considering one. "
That replacing of other types of plans is important to note because people often forget, or
don't know, that many companies had offered some sort of deferred compensation saving arrangement
ahead of the introduction of 401(k) plans. In a publication discussing the history of the DC
industry, EBRI noted that part of the drive up to the codification offered by the Revenue Act of
1978 was ongoing debate between employers and the IRS about the treatment of such plans.
In marking this milestone, it seems to me fitting, in many ways, that we are in a period of
opportunity for the DC plan industry-in fact, an attorney with Davis and Harmon that I was
speaking with recently said he believes we are closer to significant retirement plan reform than
at any time since the passage of the Pension Protection Act, 12 years ago.
There is wide consensus in the industry that we are going to see a major retirement law
passed soon. There are bills on either side of Congress-the Family Savings Act, which has
already passed the House, and the Retirement Enhancement and Savings Act (RESA) in the
Senate-that address a number of the issues facing the system.
Birthdays are always a time for reflection, and I've seen many articles written reflecting
negatively on this 401(k) milestone. I think, as one would probably expect from the editor-in-chief
of PLANSPONSOR, that negativity is the wrong approach. I worked recently with some industry
folks on a SWOT-strengths, weaknesses, opportunities, threats-analysis of the 401(k), as part
of a birthday celebration of the plan.
Yes, there were definitely things in the weaknesses and threats columns, but the strengths
and opportunities, I think, have been far greater, in the value that such plans bring to helping
Americans reach a financially stable retirement. Your work as plan sponsors in the development
of successful programs can't be understated-because I think the biggest problem with the
401(k) is that not everyone is able to participate in one.
... many
companies
had offered
some sort
of deferred
compensation
saving
arrangement
ahead of the
introduction of
401(k) plans.
Alison Cooke Mintzer, Editor-in-Chief
4 PLANSPONSOR.com October-November 2018

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