How Did 401k Get Here?
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Friday, May 8, 2015

How Did 401k Get Here?

This is where the modern 401(k) comes from.

The 401(k), the most popular type of defined contribution retirement plan in the country, has become more and more important to the mutual fund industry. (Note that the three biggest fund shops -- Vanguard, Fidelity, and Capital Group -- are all big 401(k) players.) Morningstar veteran and research vice president John Rekenthaler offers fundsters "A Brief History of 401(k)s" in his latest Rekenthaler Report column. It's worth the read.

Rekenthaler reminds fundsters of 401(k)'s humble beginnings as a 1978 federal tax code fix meant to protect existing profit-sharing plans' tax-qualified status. He tells of the DB-to-DC shift, automatic enrollment, lineup simplification, target-date funds, and automatic escalation, and he looks to the future and sees more opportunity for the small-employer 401(k) marketplace to change its ways thanks to new solutions.

A few additional tidbits (beyond what Rekenthaler mentions) are worth considering, too. First, part of what has fueled the 401(k) boom in private sector employers is all the new rules employers have faced for their defined benefit pensions, thus making DBs more and more costly and difficult to add or maintain for many employers. Second, 401(k)s also offer more choice to employees (participants in 401(k)-speak), and people like choice. And third, 401(k)s offer portability, meaning that more frequent job-hoppers can still accumulate balances (if they wish), while many DBs would leave them with little to nothing saved.

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