The 401(k) was a Mistake

The last major innovation in workplace benefits occurred five decades ago. In 1978, a seemingly minor provision in President Jimmy Carter's tax bill laid the groundwork for what would become the 401(k) plan—an innovation that promised democratized retirement security but has instead deepened economic inequality.

At the time, Ted Benna , an enterprising benefits consultant, was helping a client construct a new, cost-effective way to support its aging workforce. He stumbled upon the 401(k) section of the Revenue Act, which stated, “a qualified cash or deferred arrangement is any arrangement [in] which… the employer make[s] payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash.”?

Benna saw opportunity: what if employees could control their financial futures by setting aside pre-tax income? This would shift responsibility from employers to workers while offering tax advantages to both.

When Benna first pitched this radical interpretation, his client rejected it. Ironically, the only company to initially adopt his idea was his own employer—a family business that would later become Fidelity Investments. After the IRS validated Benna's interpretation, nearly half of all large U.S. employers began offering 401(k) plans almost overnight. Today, these plans hold $6 trillion in assets for over 60 million participants.

The 401(k) Boom

The transformation was swift and complete. Traditional pensions—which guaranteed income regardless of market performance—were rapidly replaced by 401(k)s that transferred investment risk to individual workers. This shift created enormous wealth for the financial services industry. When Fidelity went public in 1984, its stock was oversubscribed tenfold. Today, Fidelity manages one-third of all such plans nationwide—and holds over $10 trillion in total assets under management.

When asked if his innovation made him wealthy, Benna replied, "Not as wealthy as the Johnsons who live in Boston"—referring to the family that owned Fidelity. This understated response reveals a profound truth: the 401(k) revolutionized wealth accumulation for financial institutions and high-income Americans, but has largely failed the middle class it was supposedly designed to help.

A Tale of Two Earners

The data tells a stark story of two Americas. For high earners, the 401(k) functions as intended: those making over $126,000 can shelter up to $22,500 annually from taxes, while employer matches compound these advantages over time. Research shows that 76% of all employer matching contributions flow to the top two income quintiles, effectively subsidizing the already wealthy.

Meanwhile, working-class Americans face structural barriers at every turn. Nearly half of all workers lack access to employer-sponsored retirement plans. For those who do participate, the median 401(k) balance for Americans aged 55-64—those approaching retirement—stands at just $76,381, far below what's needed for financial security in later years. When immediate needs like housing, healthcare, and education compete for limited dollars, retirement savings inevitably suffer.

Structural Flaws and Systemic Inequalities

Racial disparities further expose the system's fundamental flaws. Black households' median retirement savings trail white families' by $45,000, reflecting unequal access to employer plans and historical discrimination in labor markets. Even Black workers with similar education levels accumulate retirement savings comparable to white workers with only high school diplomas—a stark illustration of systemic inequity.

Some might argue that the 401(k) offers flexibility and individual choice, a stark contrast to rigid pension systems. However, this flexibility comes at the cost of increased risk and responsibility, which many are ill-equipped to handle or benefit from.

The current system is complex and riddled with hidden costs. Participants navigate confusing investment choices while financial advisors often steer clients toward high-fee products that benefit the advisor more than the saver. These conflicts of interest cost retirement savers an estimated $17 billion annually. The result of all this is the sobering reality that half of all U.S. households today risk outliving their savings.

What began as a modest provision in a tax bill has evolved into a mechanism that reinforces privilege rather than expanding opportunity. The 401(k) works precisely as designed—not as a universal solution for retirement security, but as a tax advantage for corporations and wealthy individuals.

The Need for Reform

Meaningful reform requires structural change: universal automatic enrollment with opt-out provisions; complete fee transparency; flexibility for middle and low-wage earners to access funds for emergency needs without severe penalties; and expanded guaranteed income options that provide pension-like security without pension-like costs to employers.

Recent developments suggest change may finally be possible. The pandemic-induced workplace transformation, combined with technological innovation in financial services and progressive legislation like the SECURE 2.0 Act, creates momentum for reimagining retirement security. Financial technology startups are also developing more accessible, transparent alternatives to traditional 401(k)s, while policymakers increasingly recognize the current system's limitations.

The next revolution in retirement security must prioritize equity and accessibility over tax advantages for the privileged. After fifty years of growing inequality, we have both the knowledge and the tools to create a retirement system that truly works for all Americans—not just the fortunate few. The coming years will determine whether we seize this opportunity or continue relegating millions to financial insecurity in their later years.?

The stakes couldn't be higher: having the assurance that hard work leads to a stable future shouldn't be a luxury reserved for the wealthy, but a fundamental right accessible to every worker. ??