401(k) Inventor Says He Created a Monster

If you were a religious man and found those around you continuously doing what is best for themselves with little consideration for others, what would you do? You may turn to scripture, or perhaps even turn a blind eye. For Ted Benna, he turned to a different type of text – the US tax code.

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Let us take you back to 1980. Benna, now 74, but at the time a 38-year-old benefits consultant was beginning to feel the pressure of working in his role and balancing it with his faith. His clients, he found, were more interested in what tax breaks they could get themselves rather than helping out their employees with their tax relief. Disheartened by his fellow man, Benna felt something had to give, and Philadelphia born Benna considered leaving and asking a local Christian college for work. Things changed in September of the same year when he had his eureka moment when reading a new subsection of the tax code known as 401(k).

Something that workers now take for granted is the ability to squirrel away pretax earnings with companies matching their contributions, but it was Benna who first thought of this idea, though admittedly he wasn’t sure if it would hold up to IRS scrutiny.

He took his thoughts to his boss, Edwin Johnson, who called in a favor from a friend in the Reagan admin. This friend arranged a meeting with ‘the right people at the IRS’ said John Wright, who was once an employee at the firm and is now its president. These people at the IRS tentatively approved his idea.

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While some were on Benna’s side, he faced some stiff opposition from the majority. Even with approval from the IRS many of the larger consulting firms thought it was a scam. This was possibly because the original purpose of section 401(k) was to put a cap on the amount of executive cash-deferred plans.

But struggling to get those in the industry wasn’t the largest hurdle to 401(k)’s success. For the scheme to work Benna would not only have to convince the IRS to reduce employee wages to put the money into tax-deferred accounts, but also convince the average blue collar to take a pay cut to save for the future in what was first known as a ‘salary reduction plan.’

The scheme was first used by his own company, The Johnson Companies in 1982, where they administered just 50 401(k)’s. Despite this slow start, there are now over 50 million plans held by Americans worth about $3 trillion in assets. The plans were set up by The Johnson Companies, but the investments were outsourced to the Vanguard Group at Benna’s request to maintain the moral standard.

Over the many years that have passed, the great idea that Benna made to help his fellow man has kept him up at nights, with him stating in 2011 that he’d created “a monster” according to MarketWatch. His reasoning for this was the over complication of the scheme. The once simple idea of donating up to 25% of your salary and your employer would do the same has been contorted and twisted until very little remained of the original idea, fraught with hidden fees and complications that make even the most tax-savvy among us worry that we’ve made a wrong decision. These were the things that kept him up at night during the days when he felt that he should quit the industry, returning again over thirty years later.

He never gave up faith, though. Now semi-retired, he enjoys his time on his farm and reminisces about the good points the scheme brings. “For all it’s issues,” he says “The 401(k)’s biggest value is that it turns spenders into savers.” And with that statement, you can hardly argue with his success.