Article Taken From Valley Financial Blog
Posted by Tony Galindo
The 401(k) retirement plan changed the landscape of retirement planning. The year was 1978 when congress passed Section 401(k) of the Internal Revenue Code; a section that would become effective on January 1, 1980.
It was Ted Benna, a retirement benefits consultant, who was trying to find ways to maximize his client’s savings. His client at the time was a bank that was seeking a way to replace cash bonuses with a deferred, profit sharing plan. Ted Benna realized that Section 401(k) would allow his client to achieve their objective.
Mr. Benna felt the tax break was not enough to entice lower paid employees to participate in the plan. That was when he added the matching employer contribution as an added incentive. The bank client rejected the idea because their attorneys did not want to do something that had never been done. Consequently, Ted Benna offered this plan to his company’s employees and the rest is history.
What have we learned about the 401(k) in 29 years? The 401(k) has become an important part of a person’s retirement savings, especially with concerns over the future of pension plans and social security benefits.
The 401(k) plan is not a panacea for retirement savings. The financial crisis we experienced last year and the subsequent decrease in 401(k) values are proof positive that this retirement vehicle needs to be managed properly to be effective.
Furthermore, the matching contributions that employers offer might lead an employee to save heavily in the company. That is all well in good times, but what happens when the company’s stock does not perform well? Enron and WorldCom are poster children for companies gone wrong. Employees of these companies that trusted the financial welfare of the earnings reports lost their life savings.
The recent recession has also created another concern. There have been thousands of layoffs and persons changing employers. 401(k) participants are deciding to cash out in these economically challenging times and use the cash to make ends meet. This move may be necessary, yet it defeats all the benefits that the 401(k) plan provides. The persons taking out money are missing out on decades of tax-deferred growth and the benefit of compound interest on their investment.
These are challenging times as we recover from a deep economic recession. A properly managed 401(k) plan is beneficial for both the employer and the employee. The financial professionals at Valley Financial are available to educate both plan administrators and participants towards achieving desired results.