Revolutions often begin with drama, a powerful upheaval that seizes everyone's attention. Thinks the assault on the Bastille in 1789 or the armed insurrection in Petrograd in 1917. Yet sometimes a historic divide is crossed with little fanfare. Only much later is it widely recognized that the world has been fundamentally transformed.
That's the case with the main U.S. corporate pension plan, the 401k. The Revenue Act of 1978 contained a provision that become Section 401k of the Internal Revenue Code and went into effect on Jan. 1, 1980. Subsequent regulations issued by the federal government in 1981 gave benefit specialists the guidance they needed to set up the pension plans. The 401k has since evolved into the largest private-sector employer-sponsored retirement plan in the U.S.
The latest comprehensive data (as of the end of 2008) compiled by the Employee Benefits Research Institute, or EBRI, and the Investment Company Institute showed about 50 million U.S. workers participating in 401k plans, with $2.3 trillion salted away -- 16% of all retirement assets.
Like participation in civic associations at the beginning of the 20th century and homeownership after World War II, investment in the capital markets took on the characteristics of a powerful mass social movement, especially in the 1980s and '90s.
Millions of people flocked to Wall Street through their 401k's, individual retirement accounts and similar retirement savings plans to invest for the future. Nest eggs swelled as equities soared and corporations kicked in matching amounts. (The most common match is 50 cents for every dollar an employee contributes, up to the first 6% of pay.)
Stock market twists and interest rate turns became headline news and the media increasingly devoted resources toward helping folks manage their retirement savings.
A pair of bears and the '201k'
The 401k is a major reason the mutual fund industry mushroomed from a sleepy corner of the investing world into a financial behemoth, now with more than 8,000 funds managing about $11 trillion.Yet 30 years after the 401k's official launch, enthusiasm for the accounts appears to be waning. The rise of the 401k largely coincided with one of the great secular bull markets in history from 1982 to 2000. Memories of those halcyon years, which fostered a cult of equity, are fading. Savers have watched their portfolios crumble through two bear markets in less than a decade.
A number of corporations during the recession early in the decade -- and many more in the Great Recession -- reduced or even eliminated the 401k company match. Morbid jokes among workers about their "201k's" highlight how the pension plan has stoked everyday worker insecurity.
Although the big-picture 401k numbers are impressive, a closer look shows cause for concern. The average 401k account balance, for instance, is almost $46,000, and the median value is a mere $12,655, according to the EBRI. These amounts are certainly not enough in themselves to carry someone through even half a decade of retirement.
The biggest problem with the 401k itself is how it evolved, with all the responsibility borne by workers. Companies embraced the 401k as part of an overall campaign to rein in benefit costs. Management retreated from offering expensive traditional defined-benefit pension plans in favor of low-cost defined-contribution plans such as 401k's. In essence, with a defined-benefit plan, the employer bears all the investment risk and commits to a fixed payout of money, typically based on a salary and years-of-service formula. In sharp contrast, a 401k puts all the risk on employees, who must decide how much to invest and where to invest it.
"I find having it all up to individuals doesn't make sense," says Alicia H. Munnell, a professor of management sciences at Boston College's Carroll School of Management and the director of the college's Center for Retirement Research.
Continued: A changing, mobile work force
