The 401(k) Is Now 30 Years Old ... Should We Celebrate?

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`There will be no ticker tape parade, no swank gala held for the occasion, and probably not even speeches or a roast. Despite its deep-pocketed impact on the nation’s economy, the popular retirement plan known as the 401(k) is quietly celebrating its creation 30 years ago, exciting almost no one except perhaps its earliest contributors, who, despite the recent downturn, are the beneficiaries of patience.

The roots of this awkwardly named beast are in the tax code. And the lack of historical drama is how it should be: A major reason for our famed fund’s success is that, until its recent battering, it was shy and retiring, and not constantly splashed across the front pages. Your paycheck quietly contributed to your 401(k) retirement fund while you dwelled on what to fix for dinner. You avoided even thinking about your 401(k)’s stockpile of savings too much, or you might be tempted to pull money from tomorrow to pay for today.

Although the 401(k)’s reputation has taken a few hits in recent weeks, there are still those who defend it to the hilt: “Absolutely, you should still put money in your 401(k),” says Patrick Astre, a registered financial consultant who has been advising individuals and corporations on retirement, taxes and financial planning since 1969. He’s also the author of This Is Not Your Parents’ Retirement (Entrepreneur Press) and stresses that even in the worst of times, having a 401(k) that’s diversified is the best buffer for a flailing economy. “Invest until it hurts,” Astre concludes.

So, if you’re a believer, if you’re curious or simply want to send a card, it was 30 years ago,  on Nov. 6,  that President Jimmy Carter signed the Revenue Act of 1978, which included a provision called Internal Revenue Code Sec. 401(k). This stated that employees wouldn’t be taxed on the portion of their salary that they chose to receive as deferred compensation instead of direct cash payments.

“It was a great idea, especially from a banker’s point of view, since it meant that more individuals were going to be investing—and as tax-deferred contributions,” says Hugh Bromma, CEO of the Entrust Group, a leading provider of record keeping and other services for benefits and retirement plans including the individual retirement account (IRA) and the 401(k). Bromma has worked in the financial sector since the 1960s; he remembers that, from the start, the savings strategy was “highly regarded and well received.”

Indeed, in December 1978 the Hughes Aircraft Co., founded by reclusive millionaire Howard Hughes, was advised by lawyers that it should change its savings plan to embrace the new IRS provision. A year later, Johnson & Johnson jumped aboard, and soon after, more corporations followed, like PepsiCo and JCPenney. Over the years the plan was modified, becoming more attractive to smaller businesses and workers on all rungs of the career ladder. It wasn’t until Jan. 1, 1981, that American workers were officially allowed to start putting their money into 401(k) retirement funds.

“The good news is that employees now have much better control over how their money is invested, and the pensions are much more portable. The defined benefits plans really penalized people who switched employers,” says Bill Even, professor of economics at Miami University in Oxford, Ohio. “The bad news is that many employees really don’t have a clue now, how much they have to save to have an adequate income for retirement.”

That’s one reason why a decades-old trend is reversing: People are now delaying retirement instead of opting out early and leaving the workplace in their 50s. Many are working into their 70s. Unlike a defined benefits plan, you can’t really know what your 401(k) will be worth until after your last day on the job—a fact underscored by recent market behavior.

But for those who have used the 401(k) diligently, there’s really no downside.

Consider Kathy Solecki, 56, a commercial business insurance underwriter in Bloomington, Ill. In 1982 she had already been working at State Farm for six years but hadn’t participated in a savings plan offered by the company. But “the older timers” urged Solecki to contribute to a 401(k). She obliged, thinking, “What the heck? What do I have to lose?” She has continued to contribute every year since.

Her last statement boasted an impressive $322,377.36—it went up in 2008, primarily because Solecki stuck to her monthly contributions. “I don’t know if it will rebound enough before I retire to give me big numbers, but I still believe in contributing,” she says. If there ever is a parade in honor of the 401(k), look for Solecki to be cheering in the crowd.

Geoff Williams writes on personal finance and is the author of C.C. Pyle’s Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America.