The first corporate defined-benefit pension plan was adopted by American Express. It provided benefits for employees 60 years of age or older who had 20 years service with the company and were incapacitated for further performance of duty.
President Roosevelt signed the Social Security Act, which created a social insurance program designed to pay retired workers age 65 or older a continuing income. At that time, 5.4% of the population was over 65. By 2000, that segment of the population totaled 12.8% -- and is expected to rise to more than 20% by 2030.
Cash or deferred arrangements, or CODAs -- the precursor to 401(k) plans for several decades -- got clarified by the Internal Revenue Service after an ongoing debate between the IRS and employers about restrictions on the plans.
Studebaker Corp. closed its auto-making plant in South Bend, Indiana, and dismissed its workers and terminated its defined-benefit pension plan. The majority of 11,000 Studebaker employees received a fraction or nothing of their earned pension benefits. The plight of Studebaker employees garnered national attention, and a decade-long push to overhaul and regulate pension plans ensued.
Employee Retirement Income Security Act, or ERISA, was signed into law. ERISA codified defined-pension plans, regarding rights to pensions and funding requirements. ERISA also established the Pension Guaranty Benefit Corp., a structure that guaranteed retirement benefits for workers. While ERISA served to clarify the nebulous area of pension plans, critics of the act -- including Ted Benna, father of the 401(k) plan -- say ERISA was the culprit for the decline in defined-benefit plans. ERISA also mandated a study of salary-reduction plans that influenced the legislation that created 401(k) plans.
The Securities Exchange Act of 1934 was amended to legalize “soft dollar” arrangements between money managers and broker-dealers. In soft-dollar arrangements, mutual funds are allowed to use commission dollars from investors’ accounts to pay for research and brokerage services. The use of soft dollars has soared into the billions. The disclosure and use of soft dollars in 401(k) plans and elsewhere has become an increasingly controversial matter.
The Revenue Act of 1978 included a provision, the Internal Revenue Code Sec. 401(k), which stipulated that employees would not be taxed on the income they opt to receive as deferred compensation rather than direct cash payments. The law took effect on Jan. 1, 1980.
Benefits consultant Ted Benna gets the go-ahead from the IRS to use Section 401(k) for the first time as a pretax deferred-compensation plan for his client, Johnson Cos.
After a legislative effort to kill the burgeoning 401(k) plan faltered, Congress replaced the defined-benefit plan for federal civilian employees with a less-generous defined-benefit plan and a generous 401(k)-type plan, which amounted to a federal endorsement of shifting from a standalone defined-benefit plan to a combination of defined-benefit plan and defined-contribution plan. According to the Employee Benefits Research Institute, the move eliminated any question in corporate America about whether 401(k) plans would survive.
The IRS allowed employers to make automatic enrollment into 401(k) plans for newly eligible employees.
The Economic Growth and Tax Relief Reconciliation Act of 2001 revamped 401(k) plans: It increased deferral limits, allowed “catch up” contributions for participants age 50 or older and enabled 401(k) plans to facilitate IRA contributions beginning in 2003.
The collapse of Enron, WorldCom and other major corporations left thousands of workers with the dual problem of unemployment and decimated retirement plans because employees had large percentages of their 401(k)s tied up in company stock. The blow-ups carried echoes of the demise of Studebaker in 1963, the collapse that fueled the push for retirement-plan reform that led to ERISA and 401(k)s.
More than 47 million Americans are active participants in more than 432,000 401(k) plans. Assets in 401(k) plans total $1.81 trillion.