The 401(k) Turns 40

In 2018, the 401(k) plan celebrated its 40th birthday! Though extremely popular today, 401(k) plans came about almost by accident. IRC Section 401(k) was passed into law as part of the Revenue Act of 1978 and was included to limit executive compensation. However, in 1980, Ted Benna of the Johnson Companies used the provision to create and get IRS approval of the first 401(k) plan for his company. For this he is often referred to as the father of the 401(k).

A lot has changed with 401(k) plans in the last 40 years. In September of 2018, 401(k) plans held an estimated $5.6 trillion in assets! This represents nearly 20% of the $29 trillion in US retirement assets (total of both public and private sector plans). In 2018, the Plan Sponsor Council of America (PSCA) released their 61st Annual Survey. The survey includes the data of over 600 defined contribution plan sponsors with over 40% of responders sponsoring plans with 200 participants or less. While packed with great statistics regarding its findings, the survey highlights some interesting trends in the retirement plan industry.

The good news for 401(k) plan participants: contributions to retirement plans are on the rise. The survey showed that participants saved an average of 7.1% of pay in 2017, up from 6.8% in 2016. This, combined with an increased employer contribution percentage of 5.1%, gives a total savings rate of more than 12%! Roth contributions keep rising with 70% of companies offering this option, especially among plans with fewer than 50 employees. Additionally, the survey showed a trend toward more generous matching formulas with the use of dollar-per-dollar matching contributions above 3% of pay, increasing from 24.1% to 35.8%.

You can learn more about the PSCA or obtain a copy of the full survey on their website at www.PSCA.org.