History of 401k

So what are 401k accounts and why are they so important? If you’re just entering the workforce, then it is a word that you should quickly become familiar with, as these accounts are essentially retirement savings plans with special rules that were created to help benefit workers and ease the burden of taxes that tends to come with saving money. The term 401k actually refers to the section in the Internal Revenue Code that outlines the rules for how money can be saved at a lower tax rate.

The year was 1978 when the 401k plan was started. This was a matter passed by congress that was designed to give taxpayers a way to minimize their taxes on deferred income. Initially, these plans were not overly popular, but soon after one man started a major change in the way that people could save for their golden years. Ted Benna was a benefits consultant who was trying to find ways to maximize a client’s investments when he realized that the new 401k provision would work to allow people to save money for their retirement.

What happened afterwards was a 401k boom. The benefits were largely centered on the investor’s ability to invest in stocks and bonds at a much lower cost than before. Previously, taxpayers had to rely on pension plans, which were not as financially beneficial, and often saved their money in simple savings accounts that couldn’t really keep up with inflation, or they literally hid their money under their mattresses. The other added bonus was that employers would often match the 401k contributions that their employees were making to the plan, which of course meant more money could be saved.

There are now more options than ever before regarding a 401k retirement plan and savvy investors are able to do more with their accounts than previously possible. However, with the extra options and chances to make more money, there are more risks as well. With employers often matching employee contributions, a successful company might see employees investing a high amount of their earnings in the place where they work. When the company does well, this produces positive results for everyone. Yet if the company runs into financial trouble, most famously with Enron, then not only could employees be out of a job, but their retirement savings could be cut down to nothing, depending on how much money was tied to their company.

Most people no longer rely on social security as their main source of income in their retirement years, but instead focus their attention on their 401k savings accounts. Proper management will ensure a healthy return over decades of investing. Taking too many risks and not diversifying enough has proved costly for some families, so it is always recommended to seek professional advice in order to safely maximize the return on your 401k.

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