Ted Brenna, the “father of the 401(k),” is always working on getting more Americans access to the valuable retirement savings plan. His newest target is employees involved with small businesses.
Brenna: “I’ve learned the greatest benefit of a 401(k) is that it turns spenders into savers by making saving the first priority.”
Larger corporations have embraced the 401(k) plan, but many U.S. workers still don’t have access to a contribution plan. According to data from the latest Bureau of Labor Statistics in March 2018, 36% of private sector workers are without access.
Brenna, author of five books including “401(k) for Dummies,” has some ideas that could help some of those people, though. He provides a breakdown of 401(k)’s history, and how small businesses can help their employees plan for retirement in a recent interview, per CNBC:
How did you come up with the idea of a 401(k)?
The myth is that I uncovered a hidden paragraph buried in the Internal Revenue Code, but that isn’t correct. My contribution was adding employer matching contributions and pre-tax employee contributions even though the enabling legislation didn’t provide for either. Successfully getting this to market was another huge challenge, because employees saving for retirement wasn’t an accepted thing at that time.
What’s the biggest takeaway from your years of working with 401(k)s?
I’ve learned the greatest benefit of a 401(k) is that it turns spenders into savers by making saving the first priority.
That, then, is why it’s important that employees have the opportunity to save via payroll deduction through their employers.
Many Americans still don’t have access, with many small businesses not offering retirement plans. Why is that?
Small employers believe the 401(k) is too complex and expensive — and it is. They aren’t aware there are, in fact, better alternatives available to them. There is limited information. It is not easy for them to find out what is available.
What are those alternatives?
There are 11 states that have already implemented or are implementing state payroll deduction IRA [individual retirement account] programs. Oregon pioneered this, adopting their plan two years ago, and other states are following its model.
All the state-run plans are limited to Roth IRAs, from the information I have seen. Those are great for employees who don’t pay any federal income tax; however, pre-tax traditional IRAs are usually better for those who do pay income taxes. (Editor’s note: California, which began its IRA enrollment plan this month, plans to offer a traditional pre-tax IRA option by the end of the year.)
However, there are different alternatives than state-run plans that may, in fact, be better. They are all IRA-based alternatives, including payroll deduction IRAs with potential employer-matching contributions, SEP [Simplified Employee Pension] IRAs, SIMPLE IRAs and some new ways of potentially using those programs, as well.
What should employees do?
If their employer isn’t offering a plan, they can make them aware that there are alternative plans out there they should look into. They could potentially make the effort to gather information about those alternatives, depending upon how ambitious they want to get.
What is the federal government doing about it?
Two things. First, there is the Secure Act, which already passed the House and is pending in the Senate. It provides a number of ways of encouraging small employers to offer plans.
The second is legislation that has been proposed that would require all employers with at least 10 employees to offer a plan. [Editor’s note: House Ways and Means Chairman Richard Neal’s spokesperson said he plans to make that proposal a priority in the next retirement bill. However there isn’t a timeline for it, yet.]
What are you doing now to help small employers?
I’m working on a consulting business to help small employers determine which type of plan is best and then to implement it. We have five models. They are all IRA-based and, therefore, they don’t have the complexity of a 401(k).
They have significantly lower fees than Oregon’s plan and also have a potential for significant tax savings.
Regardless of size, businesses have to do something. The state doesn’t have to come in and run it. But it’s tough finding financial organizations to get these set up.