Assets in 401 ( k ) Plans
Billions of dollars
Year-end
Sources : Investment Company Institute and Department of Labor
in mutual funds . Mutual funds held only a tiny share of the DC plan market .
In recent decades , there has been a massive decline in DB plans . Many employers terminated their DB plans and almost no new DB plans have been created . By 2015 , only 3 % of Fortune 500 companies offered traditional DB plans to their newly hired employees . The main factor behind the huge decline in DB plans is the 1974 pension reform law , the Employee Retirement Income Security Act ( ERISA ), which imposed huge costs on employers with DB plans .
Just as employers began terminating their DB plans , the mutual fund industry used a tax law to create an entirely new type of retirement plan — the 401 ( k ) plan .
The process started when employers began offering cash or deferred profitsharing arrangements , programs under which an employee could take a bonus in cash or have it invested in a plan . In 1972 , the Internal Revenue Service proposed regulations that raised the issue of “ constructive receipt ” treatment — even though an employee elected to have her bonus go into the plan she should pay tax on the bonus because she had the right to take the bonus in cash . Policymakers wanted time to study this issue , so in 1974 ,
Congress delayed the implementation of the regulations for cash or deferred plans already in existence .
The Revenue Act of 1978 added Section 401 ( k ) to the Internal Revenue Code , providing that if rank-and-file employees participate in a plan , a payment by the employer that the employee elects to defer would not be included in the employee ’ s income . Congressional committee reports indicate that Congress enacted the provision because it was dissatisfied with the 1978 moratorium that discriminated against employers who had not yet adopted cash or deferred plans . Congress had no idea that it was laying the groundwork for an entirely new type of retirement plan — the 401 ( k ) plan .
In 1979 , Ted Benna , a retirement benefits consultant , created the first 401 ( k ) plan . He solved the issue of required participation by rank-and-file employees by providing that the employer would partly match employees ’ own contributions . The mutual fund industry saw the opportunities created by the Revenue Act of 1978 and began offering 401 ( k ) plans to companies across the nation . Since then , 401 ( k ) plans have skyrocketed . Assets of 401 ( k ) plans increased from
$ 144 billion in 1985 to over $ 7 trillion today . During this same period , the number of participants in these plans grew from 10 million to 70 million . Mutual funds are a near-perfect fit for 401 ( k ) plans , since fund organizations offer a wide range of funds , provide participants with detailed information about each fund and permit participants to easily switch among funds . Today , mutual funds account for 65 % of total 401 ( k ) plan assets .
The revolution in the retirement system — the massive movement from DB plans to 401 ( k ) plans — was due to a combination of ERISA ’ s devastating impact on companies with DB plans and the mutual fund industry ’ s ability to take advantage of a technical tax law , the Revenue Act of 1978 .
Matthew P . Fink is the author of The Rise of Mutual Funds : An Insider ’ s View ( Oxford University Press , second edition 2011 ) and The Unlikely Reformer : Carter Glass and Financial Regulation ( George Mason University Press , 2019 ). He is a past president of the Investment Company Institute , the national association of US investment companies .
www . MoAF . org | Fall 2024 | FINANCIAL HISTORY 31