Happy Birthday, 401(k)

Retirement Planning | InspireHer: Plancorp Women’s Initiative

 Susan Conrad By: Susan Conrad

Someone just turned the big 4-0.

As the director of our Retirement Plan Advisor team, I can’t help but take the time to recognize the 401(k)’s birthday as cause for celebration. After all, this type of account brings tax-advantaged retirement savings to more than 50 million Americans1. A 401(k) plan may not sound quite as exciting as a new iPhone or Alexa, but it’s quite the gift, if you know how to use it.

A Brief History of the 401(k) Plan

The 401(k) plan was born when Congress passed the Revenue Act of 1978, which included a provision [you guessed it—Section “401(k)”] to allow employees to save some of their compensation in a tax-deferred format. Originally, this provision was meant to act as an additional profit-sharing source.

Participating in a pension or profit-sharing plan was easy. Your contribution amount and investments were determined for you, but this structure lacked transparency around fees and expenses.  As 401(k)s became the norm, employees started questioning the fees paid by all types of retirement plans.

Transparency did improve as a result, but the onus remains on you to understand what you’re paying and make good savings decisions.  This is challenging, because “present you” actually considers “future you” a stranger—which can make it seem like you’re “giving away” your money to savings.   

How America Saves

It probably comes as no surprise that Americans have not been saving as much as they should for retirement in the last few decades. And they can’t be blamed, especially with the widespread lack of education about the different types of plans and savings strategies available to them.  

Fortunately, according to Vanguard’s 2018 edition of its “How America Saves” report2, retirement savings rates are back on the rise. Many employees are taking advantage of the following strategies, which virtually anyone with a 401(k) plan can apply:

  1. Automatically increase your contribution every year.

Once you get in the habit of allocating a portion of your paycheck to retirement, you won’t miss incremental increases that correlate with your raises. This strategy is becoming increasingly popular, for good reason.  Employers are using automatic enrollment to remove initial inertia along with automatic increase to ensure incremental increases each year. According the Vanguard study above, the adoption of automatic enrollment has nearly tripled in the last 10 years, up to 46% by year-end 2017.

  1. Inquire about the educational resources your company offers.

Many firms now provide a variety of educational opportunities for employees, from basic financial planning education to more advanced, topical webinars. Check with your HR department to learn what resources are available to help keep you on track.

  1. Simplify the process with asset allocation models.

Risk-based models and target date funds can streamline the investment process, while ensuring you achieve broad diversification that aligns with your risk tolerance and time horizon. Seventy-five percent of participants referenced in the Vanguard study above use target-date funds, likely due to the simplification and diversification they provide.

On top of the tax-advantaged nature of the 401(k) plan, many employers also offer a 401(k) match, up to a certain percent. That’s free money on the table for you! By incorporating the tips above into your savings strategy—and contributing, at a minimum, enough to get your employer match—you’ll be well on your way to reaching your retirement goals. And that’s something truly worth celebrating.

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This post was written by a member of InspireHer, Plancorp’s Women’s Initiative, which strives to advocate for clients and women in the community by addressing topics specific to their financial lives. For more information about InspireHer and how you can get involved, email inspireher@plancorp.com.


1Investment Company Institute: https://www.ici.org/policy/retirement/plan/401k/faqs_401k
2Vanguard, “How America Saves”: https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/HowAmericaSaves2018
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice.  All investing involves risk. Past performance is no guarantee of future results.  Diversification does not ensure a profit or guarantee against a loss.  You should consult your own tax, legal and accounting advisors.

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Susan has more than 25 years’ experience in the pension and retirement space, including 20 years at First Mercantile Trust (now a member of the MassMutual Financial Group). Her tenure at the firm armed her with a thorough understanding of the dollars and cents side of corporate retirement planning and importance of plan design. More »