The History of the 401k

Pension plans today are largely the responsibility of the individual rather than their employer. Some people, many of whom are employed by the government, are still offered pension plans by their employers, but the need to prepare for your own retirement is becoming much more common. Unless you are able to make good long-term plans or are making regular contributions to a 401k plan, then you will probably need to continue working up to or even beyond social security age if you want to maintain your standard of living after you retire.

During the 1950s, 1960s and 1970s, it was expected that an employer would provide for their employee’s retirements. People would pay their dues during a lifetime of working for the same employer in exchange for a secure income in retirement. Although their pensions would probably be less than their wages, they would still have a reliable income, even without having built up their own savings.

Towards the end of the 1970s, however, changes were made to Section 401 (k) of the Internal Revenue Code. These changes offered employees a way to avoid paying tax on savings they entered into a deferred compensation plan. The intention was for these plans to be used by executives, but the 401k plans were soon made available to a much wider range of workers. This was largely due to the benefits that offering 401k plans provided for employers. The employer is only required to pay the administrative and support costs for a 401k, unlike older programs where the employer would have to make payments during the employee’s retirement. Employers may also make matching contributions into their employee’s retirement plan. This means that a 401k plan can cost an employer much less.

An employee who works for thirty years at a salary of 60,000 dollars would be paid a total of 1.26 million dollars over a thirty year retirement by an employer offering a pension of 70 percent of their salary. If the same employee was offered a 401k pension instead, they could save a lot of money while the employee would still receive the same pension. The employer might pay approximately 2000 dollars a year in administrative costs and 3000 dollars in matched contributions, making a total of 150,000 dollars.

Choosing to offer a 401k retirement plan can save employers a lot of money, but it will shift the responsibility onto their employees. Unless these employees are willing to make contributions into their 401k plans over an extended period, and understand the importance of their retirement plans, then they may find themselves struggling in retirement. This is why it is so important for individual employees to be educated about retirement planning.

Related posts:

1. The 401k Employee Retirement Plan
2. Discrimination Testing for 401k Retirement Plans
3. Individual Retirement Accounts (IRAs) and Other Retirement Plans
4. Tips for Employee Retirement Plans
5. Selecting the Best Retirement Plan Provider

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