'Father of 401(k)', DC Expert Suggest Retirement Security Improvements

In 1980, Ted Benna, one of the founders and owners of The Johnson Companies and an executive vice president there, suggested adding a 401(k) plan to the company’s retirement program.

He tells PLANADVISER he was not trying to start a movement; the only thing he was trying to do is get people focused on saving for retirement. He notes that at the time, the large companies, including The Johnson Companies, had thrift savings plans in place pre-401(k), but those plans were for after-tax contributions. “They were just glorified Christmas clubs. Employees took their money out in December to use for expenditures; they were allowed to take the match out after two years,” he says. “I wanted to get individuals to shift from short-term savings to long-term. With the shift to pre-tax, they had to deal with not taking money any time they wanted to.”

In a January 2 Wall Street Journal article titled “The Champions of the 401(k) Lament the Revolution They Started,” Benna and Herbert Whitehouse, a former human resources executive at the The Johnson Companies express regret that companies have shifted from defined benefit (DB) plans to only 401(k)s or other defined contribution (DC) plans. Their intent in 1980 was to create a supplemental retirement savings vehicle.

In the article, Benna says, “I helped open the door for Wall Street to make even more money than they were already making. That is one thing I do regret.”

In March 2016, Benna announced a new firm, 401kBena, to provide unbiased retirement plan adviser and total fee benchmarking for retirement plan sponsors. Benna says the company folded due to lack of interest. Surprising, since there has been such a focus on 401(k) plan fees in the past decade and a number of lawsuits targeting these fees. But, Benna notes more than 90% of plans cover less than 100 employees, and those are not generally on the screen as far as lawsuits, and “they don’t have to write out a check so it’s no pain to them. That’s the biggest reason for indifference.

Benna has since drafted a book about the history of the 401(k) and fees and “how we got into mess we’re in.” He says, “Whatever time I have left, I will focus on plan fees.”

According to the Wall Street Journal article, market downturns showed Benna that individual savers have too many opportunities to make mistakes, such as yanking money out during market downturns or selecting unsuitable investment mixes for their ages. He said he doubts “any system currently in existence” will be effectual for the majority of Americans.

Benna says the problem with DB plans is they allow for promised benefits to not be fully funded. “I’m a hard believer that every system DB-based or DC-based faces a serious risk in 20 or 30 years. Even state DBs are severely underfunded, and multiemployer plans are in trouble while we’re in robust stock market. What happens when next downturn hits?” He also mentions the financial troubles of the Social Security System.

However, Benna does see some solutions to enhancing the retirement security of Americans. He says he agrees with many points in the proposals by Professor Teresa Ghilarducci, Bernard and Irene Schwartz, Chair of Economic Policy Analysis at the New School for Social Research. However, he feels the radical changes she suggests will be politically difficult.

According to Benna, an easy way politically for Congress to do something is to give participants in DC plans the ability to put their money in the federal Thrift Savings Plan (TSP) as competition to the private sector. “The plan is already there, well structured, well designed and an inexpensive way of investing,” he notes. He says an alternative is to permit individuals to move out of DC plans to a traditional IRA—one not in existence now—that limits fees, for example, to 25 bps. Benna even suggests enrolling new workers into the TSP and bumping them out of the Social Security program. Their contributions and employer contributions except for Medicare would go into the TSP.

Benna also supports the idea of changing law so DC participants can’t take cash when they change jobs, but have to continue to invest their assets in retirement. In addition, he supports requiring annuitization at retirement. “Not necessarily buying an annuity, but requiring assets to be drawn down over the lifetime of the participant and spouse,” he says. “One idea is to offer a tax incentive to annuitize. Maybe the first $1,000 per month converted into a lifetime annuity is not taxable.”

Benna says these are things that are not a total revamp of the system but incremental improvements and actionable now.

Lori Lucas, defined contribution practice leader at Callan in Chicago, tells PLANSPONSOR a critical thing to recognize about the DC plan market is that in 2006, the Pension Protection Act (PPA) created a sea of change and set the stage for dramatic improvements that have been seen in the past 10 years.

The PPA considered problems that plagued participants; they don’t save enough and they don’t invest well, Lucas notes. So, the PPA opened the door for use of automatic enrollment and a safe harbor for use of target-date funds (TDFs) as qualified default investment alternatives (QDIAs). “In our survey, two-thirds of large plans use auto enroll and of those, 77% use automatic deferral escalation,” she says. “It’s been a huge success story in getting plans to encourage savings. While the average default of 4% is still low, a cap of 30% is average for auto escalation. Getting participants to 15% total savings is a game changer for having adequate retirement.”

Also in its most recent survey, Callan found 88% of large plans use TDFs as their QDIA. “Getting participants out of the business of managing investments, which they can’t do well, scored well post-PPA,” Lucas says.

But she notes there are challenges; some people don’t have access to a DC plan, not every plan is robust, participants need to start saving when they are young and they should keep their money in the system. Lucas says various studies show a DC plan along with Social Security can replace a large amount of pre-retirement income if used well. “When we do analysis of retirement income replacement, we assume there will be Social Security, we’re not looking yet that DC plans will be the only source,” she adds.

Noting that the biggest concern with plan leakage is not loans but cashouts, Lucas contends it’s possible that new fiduciary rule opens the door to participants keeping their money in DC plans or rolling it over since there will be more fiduciary responsibility required around those conversations. 

The missing piece of the DBitization of DC plans is income in retirement, Lucas says. Right now there is a stalemate; plan sponsors have taken the position that it is not for them to offer a guarantee, unless they are offered a safe harbor for perpetuity. In the Callan survey, only 3.8% of plans offer in-plan guaranteed income for life products, and only 11% are considering it for 2017.

Lucas notes that two policy initiatives will clearly help—prevent participants from taking money from the plan unless there is a hardship and mandating participants have to save a certain amount. But, she concedes that there’s not much traction for these initiatives because mandates are not well accepted, but they could make a big difference. “Even the superannuation system in Australia still hasn’t solved the problem of people taking their money out and spending it. It’s complicated,” Lucas concludes.