Ted Benna, a benefits consultant, is widely credited with creating the 401(k) plan most companies use today. While a provision added to the Internal Revenue Code in 1978 is the basis for 401(k) plans, it was initially used primarily by senior executives who wanted to supplement their pensions. Benna came up with the idea of using matching contributions to encourage contributions from lower-paid employees. More recently, Benna has developed an alternative savings plan for small employers that want to help their employees save for retirement but find traditional 401(k) plans costly and cumbersome to administer. Kiplinger’s talked to Benna, author of 401(k)s and IRAs for Dummies, about how 401(k)s can be improved and how savers can get the most from their plans.
What advice would you give to a young person who has the opportunity to enroll in a 401(k) plan for the first time? It’s never too early to start investing, even if it’s only 1% of your pay. Bump up your contribution as you advance and get pay increases. When people tell me they can’t afford to make contributions, I tell them, for one week, keep track of the spending decisions you make that are discretionary. Beverages, entertainment and so on. Once you do that and look at how much you’re spending, decide whether it would be smart to take some of those dollars, even if it’s only $20 a week, and put it in your 401(k).