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        Ted Benna
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The Day I Designed The First 401(K) Savings Plan
By Ted Benna

Yes I do remember it well. It was a quiet Saturday afternoon when I was in my office without the distraction of a ringing telephone and co-workers wandering into my office. You should know there is myth and reality about what I actually did.

First the myth. I supposedly was sitting in my office reading the Internal Revenue Code when I discovered this little gem that no one else had found. Frankly I don't know how the myth started but it isn't true. Many people, including me, were aware the portion of the IRS Code that I used to design the first 401(k) savings plan existed. Because this provision was added to the Code for an entirely different purpose, no one had considered using it in the manner that I was about to propose.

I was in fact redesigning the retirement program for one our bank clients. At the time, I was a consultant and co-owner of The Johnson Companies -- a small benefits consulting firm located in suburban Philadelphia. As I was considering the bank's goals, I was drawn back to Section 401(k) of the Code. The bank wanted to replace its cash bonus plan with a deferred profit sharing plan where employees wouldn't have access to the money until they left the bank. The president wanted to add this type of plan because the president wanted the tax break and the bank needed the plan to be competitive with other area banks.

Several years earlier, I had designed a plan for another bank to do the same thing. At that time, the only option available was to replace the entire cash bonus with a contribution to a plan to give employees additional retirement benefits. Most of the employees weren't thrilled to have the cash bonus replaced by a plan that tied up their money for retirement.

I didn't want to have this happen again so I pondered how to satisfy the president without getting most of the other employees ticked off. It was in fact a bit of desperation that got the creative juices flowing. I realized Section 401(k) that had become effective as of January 1, 1980 provided some hope. I could use this section to design a plan allowing each employee to put into the plan whatever portion of the cash bonus he or she wanted. The only catch was that I had to get the lower-paid two thirds to put enough money into the plan to allow the top one third to contribute as much as they wanted.

Employees who put money into the plan would get a tax break but I knew this wouldn't be enough to get many of the lower-paid employees to put money into the plan. This is when I thought of adding a matching employer contribution as an additional incentive. I was reasonably confident I could get favorable results through the combined incentive of a tax break plus an employer matching contribution.

It was at this point when the potential of what I had just "created" hit. Most large employers had savings plans at the time where employees put money in after-tax and received a matching employer contribution. The Johnson Companies has such a plan. I immediately realized it would be possible to change all these plans so that employees would be able to put their money in pre-tax rather than after-tax.

The bank actually rejected the idea because their attorney didn't want them doing something that had never been done before. As a result, the first plan we did was for our employees at The Johnson Companies. This is what started the 401(k) savings plan evolution.

Read More: Detailed History of 401(k) by Ted Benna
(Reprinted from The Handbook of Employee Benefits, Sixth Edition, edited by Jerry Rosenbloom, © 2005, The McGraw-Hill Companies, Inc. Reprinted with permission. All rights reserved.)