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History of the 401(k) Investment Plan

In 1978, Congress amended the Internal Revenue Code to add section 401(k). Work on developing the first plans began in 1979 (see History of 401(k) Investments Plans: An Update, February 2005). Originally intended for executives, section 401(k) plans proved popular with workers at all levels because it had higher yearly contribution limits than the Individual Retirement Account (IRA); it usually came with a company match, and provided greater flexibility in some ways than the (IRA), often providing loans and, if applicable, offered the employer's stock as an investment choice. Several major corporations amended existing defined contribution plans immediately following the publication of IRS proposed regulations in 1981.

A primary reason for the explosion of 401(k) investments plans is that such plans are cheaper for employers to maintain than a pension for every retired worker. With a 401(k) plan, instead of required pension contributions, the employer only has to pay plan administration and support costs if they elect not to match employee contributions or make profit sharing contributions. In addition, some or all of the plan administration costs can be passed on to plan participants. In years with strong profits employers can make matching or profit sharing contributions, and reduce or eliminate them in poor years. Thus 401(k) investments plans create a predictable cost for employers, while the cost of defined benefit plans can vary unpredictably from year to year.

 

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