Your 401k Plan was a Cash Cow for Wall Street

401k Plans were launched with the 1978 IRS Revenue Act which included a provision to allow employees to receive deferred compensation and sanctioned the use of salary withdrawals for contributions.  The law went into effect in 1980 and regulations were issued in November 1981.

Large employers quickly added the 401k option for employees as an option to profit-sharing or stock plans already in place.  By the end of 1984 (according to U.S. Dept. of Labor reports) there were 17,300  of the new Plans offered with 7,540,000 people actively participating.  Total assets of these plans was $91.75 billion.

As the popularity of the new 401k plan grew, many employers greatly reduced or totally dropped their own pension plans.  Instead of becoming a supplemental savings plan for tax deferral, 401k's were now the only retirement plan that might be offered.

The growth of this savings plan was phenomenal and though regulation of contributions by worker and employer were specified, little regulation was passed for those large financial institutions who were managing these funds.  Only now are we learning how profitable managing 401k plans was for those institutions. 

With Wall Street doing exceedingly well, most participants were happy to see their savings grow.  For the management companies, the profits were immense with hidden fees at every turn.  Mediocre money market funds and investment portfolios were designed and sold to this huge pool of unsophisticated investors.

In 1983, the percentage of households with 401k plans was 12.2% - in 1998, that figure was 58.9%.  At year-end of 2003, there was an estimated 438,000 plans in place with 42.4 million participants and assets of $1.9 trillion.  Those numbers are especially interesting as the LOSS experienced in these plans in the past two years has been estimated at $1.9 trillion - the entire amount of assets listed for 2003.

There's no doubt the current crisis will lead to further changes in the laws governing 401k Plans.  What remains to be seen is whether financial institutions will be required to provide transparency and whether employers will be able to continue to view these plans as the pension plan for their company.