NCPA - National Center for Policy Analysis

Section 401, Paragraph K Created A Bonanza For Many

November 17, 2000

The 1978 Tax Reform Act contained an obscure paragraph allowing employees to set aside a portion of their pay and invest it in a selection of mutual funds, stocks or bonds held in a tax-deferred retirement account. Companies were allowed to contribute additional amounts to their employees' accounts -- which many do.

The accounts became known as 401(k) plans and they have created retirement riches for those who took advantage of them.

  • By the end of last year, there were 340,000 401(k) plans -- with 34 million participants.
  • The plans now have total assets of $1.7 trillion -- which is administered in a variety of ways.
  • Third-party administrators control just over 26 percent of plans -- followed by banks, at 14.3 percent; mutual funds, at 13.2 percent; and insurance companies at 12.2 percent.
  • Other administrators include companies' internal staff, consultants, brokerage firms and investment advisers.

Some critics contend the plans should be run by independent financial firms because financial services companies have an interest in promoting their own products. They question the role of employers in administering the plans. They also claim that the cost of the current system is higher than it should be.

And they have approached the Labor and Treasury departments, as well as the Securities and Exchange Commission, asking the government to consider issuing guidelines that would change the way the industry does business.

Source: Danny Hakim, "Controlling 401(k) Assets," New York Times, November 17, 2000.

 

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