The 401(k) was an accident. A consultant found a loophole and it became how America retires

Your parents' or grandparents' generation often had pensions: work somewhere long enough, and the company paid you every month in retirement. Now most people have a 401(k) instead. Nobody designed that switch. It started as a footnote.

The footnote

In 1978, Congress passed a tax bill called the Revenue Act of 1978. Buried in it was a new subsection of the tax code: Section 401(k). It was mainly meant to settle how a certain kind of deferred compensation — think bonuses that executives could choose to take later — would be taxed.

Nobody was imagining a national retirement system. Section 401(k) took effect on January 1, 1980.

The loophole

In 1980, a benefits consultant named Ted Benna was trying to redesign a bank client's bonus plan to save on taxes. Reading Section 401(k), he realized something the law didn't spell out: it could be used for ordinary employees to set aside part of their regular paycheck before taxes — and the employer could add a matching contribution to encourage them.

The bank's lawyers didn't want to be first. So Benna's own firm, The Johnson Companies, set up the plan for its own employees, making it one of the first 401(k) plans of its kind.

In 1981, the IRS issued rules that clearly allowed paycheck contributions. Big companies jumped in, and over the following decades many of them froze or dropped their pensions.

The monster

Today, Americans hold about $9.9 trillion in 401(k) plans. Benna has said he has mixed feelings about what he started — once calling it a "monster" — because the system put the job of saving and investing on ordinary workers, many of whom were never taught how.

What this means for you

The best part of Benna's idea is still the employer match, and lots of people leave it on the table.

• Contribute at least enough to get the full match. If your employer matches 50% of the first 6% you put in, a 6% contribution gets you an instant 50% return. Nothing else in finance does that.
• Check the vesting schedule before you leave a job — matched money may not be fully yours until you've stayed a certain number of years.
• Look at the fees in the funds you pick. Small percentages add up over decades.

How the match, vesting, and Roth vs. traditional actually work.

Quick reference

• Section 401(k) was added to the tax code by the Revenue Act of 1978, mainly for deferred compensation
• In 1980, consultant Ted Benna realized it could be used for regular paycheck savings with an employer match
• The IRS clarified the rules in 1981 and companies adopted it fast
• 401(k) plans now hold about $9.9 trillion
• Always contribute enough to get the full employer match