History of 401k Plans

Throughout history 401k plans have been a very powerful investment tools for the average employee. The earliest 401k like plans started in the early 20th. These plans where called Defined Contribution plans (DC) and where created in order to help the average employee save money for their retirement.

The DC plans allowed employees to invest money, but it had to be invested with after tax dollars. The big benefit of these plans is that the employers could match the employee with their own profits tax free.

These early plans also allowed employees to contribute as much or as little into their plan as they could afford.

Note: This was eventually changed in 1974 when ERISA passed putting the first limit on how much an employee could deposit into their retirement plan.

Finally 401ks were born on November 10, 1981. This is when it was agreed that an employee could invest pre-taxed money into a new plan, the 401k in exchange the money must be taken out of the employees paycheck directly before it is received.

This new plan saw wide popularity as more and more people began investing into it. By 1983 nearly half of all major firms were either offering the plan or were planning on offering it.

By the mid 1980s there were less than 8 million participants. That number has grown tremendously since. Today it is the most popular employee sponsored retirement plan in the US with over 65 million participants.

The plan’s popularity can be in part traced back to the fact that it is easier for the employer to set up. With a 401k the employer does not have to make any required pension contributions. Instead they only need to invest into the plan if they choose to do so.

Catch Up

One of the newest 401k history laws was passed in 2001 allowing employees over the age of 50 to increase the amount that they are depositing into their 401k in order to catch up on their savings.

Self Directed 401ks

The self directed 401k is a new plan which lets the individual’s take charge of their money and how it is invested. Many companies are reluctant to give this plan out to their employees for fear of their employees making bad investment decisions and losing their money.

Even so, more and more companies have been looking into the idea of giving their workers more control over their 401ks.

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