Читать книгу Retirement Planning For Dummies - Matthew Krantz - Страница 19

Not many sections of the Internal Revenue Service’s tax code are famous. But the 869-word paragraph k added to Section 401 of the Internal Revenue Code in 1978 is a rock star. And we can thank not a forward-looking Congressperson but a detail-oriented lawyer in Pennsylvania named Ted Benna.

Benna created the first 401(k) plan — and revolutionized retirement planning in the process. He’s known as the “Father of the 401(k).” Benna, a benefits consultant, was working with a bank, hoping to find a better way to keep employees that didn't involve handing out fat annual (and taxable) bonuses. The bank wanted a profit-sharing plan that would keep them competitive with other banks in terms of compensation — and give them a tax break on the contributions.

In 1979, Benna knew that IRS code 401(k), passed in 1978, was going into effect in 1980. Although many accountants knew of the provision, they paid little attention to it because it was intended to serve a different purpose. But Benna saw how employees could contribute all or a portion of their bonus into a 401(k) and get immediate tax relief. To sweeten the pot, Benna added a matching contribution option for the bank.

Benna’s bank client took a pass on his invention, afraid to do something new and worried that the Internal Revenue Service would reverse it. So Benna created a 401(k) plan for his own company, The Johnson Company (not Johnson & Johnson as widely believed).

Did Benna make a fortune creating this retirement-planning tool? He told me he did fine consulting with firms looking to create 401(k) plans. But since 401(k) is an IRS tax code statue, he couldn’t trademark the retirement account structure. It wasn’t long before the Fidelities and Vanguards of the world rushed in.

In Benna’s book, 401(k) Forty Years Later, he acknowledges that 401(k)s aren’t perfect. He laments the high fees charged by financial companies that administer these plans (this book will help you with those). But he also takes issue with the idea that pensions were better. “There is a widely held myth that we once had a wonderful retirement system that is now corrupted,” he writes in his book.

He points out several problems with pensions, most of which 401(k)s solved or at least addressed:

 Restrictive inclusion rules: Many pension plans would not allow you to participate until you were 30 or older. This restriction delayed the accrual of benefits to workers when time was on their side. 401(k) plans are typically open to employees after a month or a year at the longest.

 Onerous vesting rules: In many pension plans, you had to stay at the company until you reached 60 before you vested. Leave before then and you got nothing. Some employers would try to dump employees before they vested, saving them a pension liability. 401(k) plans vest, too, but employees are always entitled to the funds they contributed. Employers can hold back employees’ access to only the matching funds. Typically, vesting happens gradually, with a maximum holding period of six years.

 Limited availability: Benna says only a third of non-farm workers in the private sector had access to a pension plan. Employees at large companies had pensions, but they were rare in smaller firms. Lower costs of 401(k)s make them much more feasible for more companies.

 Risk of failure: For many years, the rules were lax as to how fully companies needed to keep pension plans funded. Many companies simply didn’t put the necessary funds in the pension, so retirees couldn’t collect the money they thought was coming. 401(k)s are filled with actual contributions, not promises of future payments. Employees can always check their 401(k) balances and see how much they have.

“The truth is that the private pension system of the 1960s was far different than the image that is commonly presented today. It was far from ideal and may have, in fact, been much worse than what we have today,” Benna writes.

If you think your tax rate will be higher when you retire, consider a Roth IRA or Roth 401(k) plan. These plans tax your retirement contributions immediately, but you take out already taxed money later. For more on these Roth plans, see Chapter 4.

The rise of defined contribution plans changed retirement planning forever. Employers shifted to employees the responsibility of generating and providing future retirement income.

Although employees take on more risk and responsibility, they also gain some freedom. They can decide how much, if any, to contribute to the plan. They're also less beholden to their employer. If they get another job offer, they're free to pick up their 401(k) and go elsewhere. They can roll over, or transfer, their 401(k) to a personal retirement account or to their new employer’s 401(k) plan. The only catch is that employees can tap only the part of the 401(k) that they contributed or is vested. Vesting is described later in this book, but for now just know that employers can hold back some of their contributions to a 401(k) if the employee doesn’t stay a certain number of years.