401K History Development

Reviewing 401k history and development today, it seems just about everybody has some sort of savings plan for the future. Among the most popular of these retirement and savings plans are the 401K plan. This was not always the case. The 401k plan is still a relatively new invention. Many older employees, for example, still have the old-style defined pension benefit plans. In this article, we will outline the 401k history and development of the plan. The 401k plan was named after a section of the Internal Revenue Code in a 1978 congressional provision intended to offer taxpayers breaks on deferred income.

401k History

401k Section Added to IRS Code

Historically, companies in the United States were only able to pay their employees regular wages. The employee would have to pay taxes on all income earned in a given year. Moreover, both the employee and employer would have to pay their respective portions of the FICA taxes. This all changed in 1978, however, with the addition of section 401k to the Internal Revenue Code.

401k Deferred Taxes

Under section 401k, employees could elect to receive some of their wages up front, while postponing certain payments until retirement. The major advantage to employees was the fact that income taxes on these wages were also deferred. Section 401k went into effect starting in 1980; it was an immediate success. Before long, the popularity of 401k plans was well established. In 1981, the IRS put forth new regulations regarding defined benefit pensions. As a result, many companies changed or eliminated their defined benefit pensions. By this time, it was clear that the 401k was more flexible, easier to account for, and less expensive for employers to maintain. The defined benefits pension was on its way out during the 1980s, while the 401k plan only grew in popularity. Midway through the decade, it is estimated that nearly half of major American companies had some sort of 401k plan.

401k Matching Contribution

From the standpoint of corporate employers, the 401k plan offered a much less expensive – and much easier to manage – retirement package than the existing defined benefit plans. With the 401k plan, employers are only responsible for the administration costs of the plan when they make matching contributions. The 401k retirement plan allows employers to plan their expenses as well. In profitable years, companies are able to offer matching or profit-sharing contributions. These contributions by the employer can be eliminated during less-profitable periods.

In this article, we have outlined the 401k history development over the years.