It isn’t every day that you have the opportunity to speak to Ted Benna, who is best known as the father of the 401(k) retirement plan in the United States, which allows eligible employees of a company to save and invest for their own retirement on a tax-deferred basis.
Benna, 79, resides in north-central Pennsylvania near Williamsport, which is the home of the Little League World Series. He has been married to his wife Ellie for 61 years. He has four children and nine grandchildren. Ellie serves as the pastor of two churches, and they are both strong supporters of Israel.
About 40 years ago, he created a savings plan with employee pre-tax and employer matching contributions and gained approval from the IRS. Benna, a retirement benefits consultant at the time, based it off a provision in the Tax Revenue Act of 1978 – Paragraph k of Section 401. As of 2020, 401(k) assets totaled over 6 trillion dollars in US retirement assets. The total amount generated by these plans is between $10 and $15 trillion counting benefits paid and amounts rolled over into IRAs. Offerings in 401(k) plans from employers usually include stock and bond mutual funds, as well as target-date funds and stable value funds issued by insurance companies, and even an employer’s stock.
An interesting fact to take note of is that if you work in Israel, you cannot usually continue contributing to the plan unless you are employed by an American company. However, if you had such a plan in the US, you can often roll it over into an IRA and easily manage it from Israel. Some of the major 401k providers in the US include such major companies as JP Morgan Chase, Charles Schwab, Edward Jones, Fidelity, Vanguard and the list goes on.
Today, Benna heads Benna401k, LLC, a consulting firm he founded. He has received many citations for his accomplishments including the Investment News Icon & Innovators Award – 2017, the 2001 National Jefferson Award recipient for Greatest Public Service by a Private Citizen, the 2001 Player of the Year selected by Defined Contribution News and the Lifetime Achievement Award by Defined Contribution News 2005. In addition, he was one of eight individuals selected by Money Magazine for its special 20th Anniversary Issue Hall of Fame, was selected by Business Insurance as one the four People of the Century, was one of ten selected by Mutual Fund Market News for its special 10th Anniversary Issue Legends in Our Own Time and has authored five bestselling books, including 401(k) for Dummies and 401k-Forty Years Later.
He is currently writing 401(k) & IRA for Dummies, which is set to be released this fall. I recently had the chance to speak to Banna about his life, career and his views on the plan he helped create 40 years ago – and on what people are doing right and wrong with retirement today.
How did you come up with the concept of the 401k?
There were a number of times before and after 401(k) where I was able to find a way to use existing tax law in a way that others hadn’t seen. Sometimes this happened when I was attempting to help a client accomplish a specific goal. Other times it was when I was attempting to build a business to support my wife and four children. In this specific instance, I was helping a Philadelphia area bank redesign its retirement plan. The CEO’s major goal was to replace a cash bonus plan with a qualified employer funded retirement plan. The cash bonus would go into the plan, be invested, and would provide additional retirement benefits. I helped another bank do this a couple years earlier when the bank placed the entire bonus into a plan for each employee. Explaining the new plan to employees was part of my assignment. Many of them weren’t thrilled with the bank’s decision. The law changed between these assignments enabling me to design a plan so that each employee could decide how much of the bonus would go into the plan. This new flexibility would obviously be a lot more acceptable but there was a major “gotcha”. The amount the highest paid one-third of the employees could put into the plan was tied to the average percentage of pay the lower two-thirds put into the plan. I didn’t think a small tax savings would be enough to get satisfactory results. It was at that point when I decided to include a matching employer contribution thinking the combination of tax savings and a 25% matching contribution would produce satisfactory results. The next idea was to enable employees of other employers to make pre-tax contributions via a salary reduction agreement rather than eliminating a bonus. Neither the matching contribution or salary reduction employee contributions were included in the law; however, there wasn’t anything prohibiting them. Both were questionable until the Treasury issued regulations making them possible.
What’s the biggest takeaway from your years of working with 401(k)s?
The fact that it has helped spenders become savers by making savings the first priority. It also has been a great benefit for middle income wage earners. Those in the $30,000 to $250,000 range. Getting tax help to save for retirement is important for this group.
While larger corporations have embraced the idea, a large chunk of US workers (such as small business employees) still don’t have the opportunity to contribute to an employer plan. Why do you think that is?
There are more than 500,000 401(k) plans and more than 90% of them cover less than 100 employees. Many small employers offer 401(k)s; however, close to half the private workforce isn’t covered by an employer sponsored retirement plan. I have spent the last three plus years working on some new IRA-based employer sponsored plans because 401(k) is too complex and expensive for many small businesses. Especially for solo entrepreneurs, family businesses and others with owners who earn less than $100,000. These IRA based plans are easy to set up and operate. I have found there is a huge lack of awareness about these plans. In addition, there is little help available from the investment community because this isn’t attractive business for them. Therefore, I am currently helping small employers pick the best type of plan for a one time $100 fee. There have been some very interesting results.
As small businesses struggle during the COVID-19 pandemic, how can we help their employees save for retirement?
I have written a guide that explains the four types of IRA-based plans. The first two models are payroll deduction IRAs with matching employer contributions. To the best of my knowledge, no one else is helping small employers set up such plans. The other two models are the SEP-IRA and Simple-IRA. I found ways to package these more effectively.
Do you think that the US federal government is doing enough to help?
There are a few things they need to do as follows: 1. Require all employers that offer a 401(k) to automatically enroll all eligible employees and to automatically increase the contribution rate annually. 2. Require all employers to offer a payroll deduction plan. 3. Require the money to stay invested for retirement when employees change jobs. 4. Exclude the first $1,000 of guaranteed life income from tax. I have owned and managed a couple of small businesses. Deducting contributions from employee’s pay and sending the money to be invested isn’t a big deal.
Last, but certainly not least, I must ask – have you ever been to Israel?
No, but my wife and I would both like to do that. She is a pastor of two churches and my faith is the most important part of my life. The fact that I consider 401(k) to have been given to me in answer to prayers regarding my future direction has been mentioned in many of the early 401(k) articles. ■
The writer, who received his undergraduate degree in business (cum laude) from Yeshiva University and his MBA with double distinction from Long Island University, is a financial adviser who resides in New York City and is involved in Israel-based and Jewish advocacy organizations