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What’s The Story? Part 1

12/19/2018
By Jack Towarnicky

What’s the story on the 401(k)’s 40th “Birthday?”

My sister and brother-in-law were lifelong members of the news media; they reported on news and wrote columns and editorials for more than 40 years in daily newspapers.  I visited them from time to time.  I can still hear my sister playfully and rhetorically asking the dog: “What’s the Story?”  Today that 40 plus years as a reporter has left its mark - she still says, “What’s the Story, Morning Glory?”

If my sister or brother-in-law were writing a story about the 401(k) on its 40th Birthday, they would ask “what’s the story,” or, “what’s the real story?”   

Others writing stories about the 401(k) often fall back to a convenient story line – the 401(k) is a “failure,” or “inadequate,” or there is a “retirement savings crisis.”  Many times, the criticism isn’t focused on the 401(k) itself, but on employers who haven’t adopted a 401(k).1   

In an internet search, I got 215,000 posts on “retirement crisis” and only 45,000 on “retirement success.”  You’ll see comments such as:

  • The 401(k) is hopelessly inadequate 
  • Workers can’t afford to contribute
  • Workers aren’t knowledgeable enough to invest wisely 
  • Savings are inadequate, paltry 
  • Many won’t be financially prepared for retirement 
  • Only half of all workers participate
  • People leave employer match on the table 
  • People cash out before retirement 
  • Works OK for high-income people who start saving early, no one else 
  • Workers are more mobile today than in the past

But, here’s the real story.  Today’s 401(k) media critics are describing the 401(k)’s past, not today’s or tomorrow’s 401(k).  It’s akin to comparing a 2019 Tesla to a Chevy Corvair, a Ford Pinto, a Yugo, or an AMC Gremlin.  Remember them?   

It is way past time to acknowledge that today’s 401(k) has grown and successfully morphed into America’s primary retirement plan.  In fact, I’d argue the 401(k) has gone through three versions or “releases” since 1981:   

Release 1.0 - thru 1986:     

  • 401(k) deferral capability was added to existing thrift/savings or profit sharing plans
  • All plans used voluntary enrollment
  • Most participants were ineligible until they met age, service and classification requirements
  • Modest number of investment choices 
  • Monthly or quarterly investment valuation
  • Full vesting usually after five years of service
  • Tax incentives encouraged lump-sum cash out 
  • Asset retention discouraged
  • Limited payout options  

Release 2.0 - 1987 - 2008:

  • Tax Reform Act of 1986:
    - Created inside limit on deferrals
    - New discrimination tests  
  • Hundreds of thousands of employers adopt plans 
  • Safe harbor plans grew in number 
  • Industry shifts to daily valuation of investments   
  • Early risk takers adopt automatic features 
  • Expansion of the number and diversity of investment options
    - Payout activity changed after curtailment of lump sum tax incentives
    - Increased pre-retirement liquidity – hardship withdrawals and plan loans 

Release 3.0 - after 2008:

  • Widespread adoption of automatic features 
  • Roth contribution capability added 
  • More plans adopt immediate eligibility for new hires 
  • More plans vest 100 percent once participation starts 
  • Widespread changes to investments:
    - Qualified Default Investment Alternatives (QDIAs)
    - Index funds
    - Target date funds
  • Increased focus on asset retention, and the variety of payout options 
  • Focus on fees, which lowers participant costs (fee litigation, mandatory fee disclosures, index fund prevalence, etc.) 

There’s much more detail.  But, suffice it to say that yesterday’s 401(k) is nothing like today’s 401(k).2 

So, instead of focusing on past gaps and limits, everyone should recognize that the real story would focus on 401(k) improvements and successes – that individual account retirement savings (DC) assets have grown from $9 Trillion in 2007 to more than $17 Trillion today!3 Further, today’s 25-year-old will reach his/her social security retirement age of 67 in 2060.  If growth continues at the same rate since 2007, DC assets will exceed $190 Trillion! 

Let’s not look back through the prism of baby boomers, let’s look forward with the millennials – CAVU!4  And, let’s dream a little about the changes that might become part of 401(k) Release 4.0.  


1A. Biggs, No, Retirement Plan Participation Isn't Plummeting, Forbes, 12/11/18, Accessed 12/12/18 at: https://www.forbes.com/sites/andrewbiggs/2018/12/11/no-retirement-plan-participation-isnt-plummeting/#621f4821c23f  
2N. Adams, The Birth of a Notion, 11/6/18, Accessed 12/10/18 at:  https://www.psca.org/blog_nevin_2018_1 ; see also:  J. Towarnicky, Known: How Your 401(k) Can Make the Leap from Good to Great (First of Two Articles), 9/4/18, Accessed 12/10/18 at:  https://www.psca.org/blog_jack_2018_41  
3ICI, Retirement Assets Total $28.3 Trillion in Second Quarter 2018, 9/27/18, Accessed 12/10/18 at:  https://www.ici.org/research/stats/retirement/ret_18_q2  Compared to ICI 2nd quarter 2007, Accessed 12/12/18 at: https://www.idc.org/pressroom/news/ci.07_q2_retmrkt_update.print     
4M. Pence, Eulogy for George H. W. Bush, 12/3/18.  “CAVU is a term Navy pilots have used since World War II," the vice president said. "It stands for 'ceiling and visibility unlimited.”, Accessed 12/11/18 at:  https://www.realclearpolitics.com/video/2018/12/03/pence_eulogizes_bush_at_capitol_ceiling_and_visibility_unlimited_describes_this_special_man.html  5J. Towarnicky, My Financial Wellness Solution: The 401(k) as a Lifetime Financial Instrument, May 2017, Accessed 12/10/18 at: https://www.soa.org/essays-monographs/financial-wellness/2017-financial-wellness-essay-towarnicky.pdf  

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