It's been a third of a century since benefits consultant Ted Benna helped bring attention to a new but obscure provision of the federal tax code known as 401(k), which was meant to provide a tax break for folks with deferred income. As co-owner of the Johnson Cos., Benna was redesigning the retirement program for Philadelphia-based Cheltenham National Bank when he realized that the provision allowed employers to use salary deductions as tax-deferred contributions to employee retirement plans.
To be sure, Benna was not the only one looking at the possibilities afforded by the 401(k). Among other firms, healthcare-products giant Johnson & Johnson, advised by consultant Herbert Whitehouse, was also investigating. Indeed, J&J would become one of the first major industrial firms to adopt the 401(k).
Ironically, Cheltenham National initially declined Benna's proposal for such a plan. But other firms, starting with Benna's own, jumped at the opportunity. The 401(k) quickly became the retirement-savings plans of choice for millions of Americans, and Benna was dubbed the "father of the 401(k)." (The man some called the "godfather," Benna's partner Edwin Johnson, died last month at 82.)
But the 401(k) has evolved far beyond what Benna envisioned three decades ago, and not for the better, he thinks. Today, he says, the system has grown far too complicated for the people it was meant to benefit—rank-and-file employees who most likely aren't sophisticated investors.
We spoke with Benna recently about how he thinks the 401(k) could be improved. An edited transcript:
You've argued that the investment choices offered by 401(k)'s have become too complex. How did that happen, and is the asset-management industry partly to blame?
The general perception is that it was driven because participants demanded it. In reality, it was a few people who were either more knowledgeable or were troublemakers—depending on who you're talking to—who kept complaining to their employers that they don't offer the Money Magazine flavor of the month. The expansion was really in reaction to trying to satisfy a fairly small group of participants. As time went on, of course, it became primarily an investment business. Investments became king. This happened getting into the '90s. That era saw the evolution of the business being driven by what have become known as investment advisers, which didn't even exist in the early days of the 401(k).
No question the industry strongly began to propose and structure programs across what they call the full risk spectrum, [arguing] that you weren't getting adequate diversification unless you had a large-cap growth fund, large-cap value, midcap growth, international, and so on. That became the norm, and with the professional investment folks out there helping to get business, helping the employer structure the plan and helping participants build a portfolio—that's where the business went. It's gotten overly complex for the average participant.
How would you simplify the offerings? And would you abolish self-directed accounts?
Here's my favorite structure if I had my way—and I advised one company with about a $60-million plan that I helped do this. You blow up the structure with the 15 different choices. I'd put all the money into targeted-maturity funds, which are already broadly diversified, automatically rebalance and automatically reduce risk as the participants age, making it easier for them to run their investments. We put everyone into those, but in addition provided an open mutual-fund window for the few folks who still prefer doing it on their own. Those who want to put the time and effort into it should, in my opinion, have access to the same broad mutual-fund alternatives they'd have if they were managing their money outside a 401(k). With the company I advised to do this only about 5 percent of the participants ended up doing so. The rest are very comfortable leaving their money parked in target-maturity fund.
I would also make it mandatory that employers automatically enroll employees, who would have to elect not to participate, rather than the reverse. And I would automatically increase contributions each year—with the opt-out option as well.