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How the 401(K) Changed the Saver’s World


How the 401(K) Changed the Saver’s World

Written by: Cindy Meuller

I loved saving money as a little girl.  One of my favorite toys was a coin bank cash register.  It wouldn’t open until it reached $10 dollars.  With a small allowance, it took months until I could dump out all the change, organize and count it by nickels, dimes, and quarters.  My Mom would take me to our local credit union to deposit all the coins into my passbook savings account.  Remember those?  So easy and simple.   This was the 60s, 70s, and 80s.  A simple time for our parents and grandparents. Between pensions and social security, most of their income sustained their desired lifestyles through these sources.  In addition, their homes were paid off and the cost of health care was in control.  They lived within their means.  Saving for the future would be for splurges like travel or even a vacation property. Savings accounts were paying 5.75% in 1986¹ and Certificates of Deposit 8%².  There were many options to save without taking any risk.

Now fast forward to today.  There is a savings crisis with 1 in 3 Americans saving $0 for Retirement, according to a GoBankingRates survey³.   How did our society morph from care-free to ill-prepared?   I would say it is from the creation of the 401k.  A little history; the 401k was part of a IRS code passed in 1978⁴.  Nothing was really made of it until the 80s when a benefits consultant wanted to use it for executives to shield income from taxes.  It took years for the 401k to become popular as a savings option, helped by the bull run of the 90’s as employees wanted to take part in the biggest stock market growth in history.  By 1996, assets in 401(k) plans surpassed $1 trillion, with more than 30 million participants⁵.  At the same time mutual funds took off because 401k’s needed investment options, which made it even easier for companies to implement and administer 401k plans.   For executives, this was one of the only ways that they could defer taxes on their income.

The IRS didn’t want only the high income earners to benefit from tax deferral on the 401k contributions.  Safe harbor rules such as company matching and vesting periods were created to encourage the rank and file to also participate.  Those who were nearing retirement were feeling confident that nothing could derail their lifestyle.  Tack on the dot-com boom of the late 90s and the “irrational exuberance” as Alan Greenspan said, savers were starting to feel giddy about their investment prowess. ⁶

The rapid rise of technology in the 90s also changed the saving in retirement landscape. Many of the new IT companies didn’t need a pension plan to attract talent.  Instead, stock options became all the talk around the water cooler.   With the rapid rise of the stock market, even companies with a pension found it not necessary to take on all the risk of a defined benefit plan, but instead shifted the risk to employees with defined contribution plans, namely 401(k)s.

The roaring bull market came to a quick end with the dot-com bust of 2000-2003, and then again with the Great Recession of 2008-2009.   A wake-up call that having too much at risk in the stock market could derail retirement, or worse, having to go back to work.  These concerns were not around in our parents and grandparents generation where market fluctuations only impacted the rich.  Now they impact anyone with a 401k – and especially those who have little else for income sources.

Related: How to Retire On Your Terms

The advent of the 401k not only benefitted the Mutual Fund industry, it also attributed to the growth of the Financial Planning profession.  Questions needed to be answered, such as “How much income can I take?” or “When can I retire?”  Savers with 401(k)s have sizable wealth that not only needs to be managed, but now needs to be methodically distributed back to the saver for the rest of their life.  Income, portfolio management, estate distribution, asset protection, and tax minimization are now the cornerstones for a financial plan.

Whether you do-it-yourself, or hire a Certified Financial Planner ™ to help you, it is necessary now, more than ever, to have a plan in place.  Having your head in the sand and hoping for the best might work if you had retired in the 90s, but would have been devastating if you had retired in 2000.  You were told to save using your 401(k), and now that companies have eliminated pension plans, it has put retirement success in your hands. The difference between success and hope for the best is Activity!  Activity = Success.  Create a plan!

4. See section 135(a) of the Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. 2763, 2785 (Nov  6, 1978).
6. Said in a speech to the American Enterprise Institute:
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