The original proponents of the 401(k) plan, which has become the dominant source of retirement savings for most Americans, are rueful about the revolution they unintentionally began.
Ted Benna, the person widely credited as the creator of the 401(k), believes he “created a monster”. In 1978, Congress approved The Revenue Act of 1978, which ushered in the 401(k) plan. The government was ostensibly acting in the spirit of giving employees options for retirement and alternatives to the traditional standard pension plan. Sounds pretty good, right?
The underpinnings of this legislation begins to tell the real story. Large companies were lobbying Congress to shut down their pension plans because 1) they were too expensive to administer, and 2) the employer held all of the investment risk.
While the 401(k) plan might seem beneficial for the stock market and the economy, it’s contributing to a substantial risk, particularly regarding the market’s stability. The plan encourages billions of dollars to flow into the market at the same time, which artificially inflates stock prices due to the increased buying pressure. This mass contribution has pushed the Dow Jones Industrial Average above 34,000 — a 3,500% return since the inception of the 401(k).
Furthermore, many funds, driven by law, are obligated to invest in S&P 500 companies such as Apple, inflating their valuations and making them less advantageous investments for individuals. This rule has inadvertently made blue-chip stocks more expensive for everyone, impacting regular investors who wish to purchase shares in companies like Apple, Tesla, or McDonald’s. While initially conceived as a benefit for employees, the 401(k) plan is now posing challenges to stock market stability and affecting the fair valuation of top-tier companies.
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