The vast majority of people are already familiar with 401k retirement plans. Generally, when people start a new job, they are offered the plan straight away. Anyone who is under the age of 45, in fact, is unlikely to remember not being offered one at all. Let’s take a look at the history of the plan.
History of 401k Retirement Plans:
The 401k was developed in 1978. It’s name came from the Internal Revenue Code (IRC) Section 401(k). On January 1, 1980, it became federal law. Before it existed, individual companies would have their own pension plans. Throughout 1979, lots of companies started to adopt the plans. And, in 1982, companies like FMC, Johnson & Johnson, JC Penney, PepsiCo, Savannah Foods & Industries, Honeywell, Coates, Herfurth & England, and Hughes Aircraft Company had implemented it, becoming the pioneers of the plan itself.
When first developed, the plan was directed at company executives. However, because of the higher levels of yearly contributions than what the IRA (Individual Retirement Account) offered, other employees started to be interested as well. It was more flexible than the IRA, it came with a company match, it could be loaned against, and it offered an investment choice of employer stock. Mainly, it has become easier and easier for employers to offer a 401k than to offer individual pension plans. This is because the only payment they had to make were support costs and administration. The latter could, sometimes, even be passed on to the employees. Plus, while a match is customary, it is elective. This means that employers could offer a match during a good year, but eliminate or reduce them during difficult years.
Clearly, the 401k was a lot more flexible for employers as well. It ensured that they knew exactly what the plan would cost them. Because of increased life expectancy and birth rate decreases, more and more retired workers will continue to exist in this country. By putting a 401k plan in place, pension plans will come under much less strain.
Today’s 401k plans also allow workers to save up and get ready for their retirement, without having to pay income tax until money is withdrawn. Furthermore, the company match provides an incentive for employees to sign up, which means more people will invest in their pensions. Their assets can also grow much bigger, because plan holders can choose to invest in a variety of other investments. No longer are they tied solely to guaranteed investment contracts or GICs, mutual funds, bonds, or stocks. Rather, they can invest in any vehicle they are interested in, which also allows them to greatly diversify their portfolio and secure their financial future.
It is a shame, considering all of this, that so many employees continue to neglect using their 401k retirement plans to their full advantage. Too many people continue to miss out on important opportunities that allow them to see an investment return of between 25% and 100%, guaranteed. The guarantee lies in the fact that the vast majority of companies do offer a company match.
