The 401(k) Killed Off Pensions

President Jimmy Carter talks to onlookers before signing his economic, tax, and budget messages at a ceremony at the White House in Washington on Jan. 20, 1978 Photograph by John Duricka/AP Photo

1978 President Jimmy Carter signs a revision to the tax code allowing workers to contribute part of their pay to tax-sheltered accounts.

“There was absolutely no discussion in ’78 that if you do this, the world is going to change,” recalls Carter-era Treasury official Daniel Halperin of the 869-word provision in the tax code that created a $4.4 trillion pool of retirement savings. According to the Investment Company Institute, 18 percent of all retirement assets are held in 401(k)s, the third-largest stash behind IRAs and government pensions.

How did an obscure section of a bill designed to cut taxes become a ubiquitous part of life-planning? Companies realized that they could slash future liabilities by moving employees from pensions into tax-sheltered retirement accounts: From 1985 to 2012, the number of Fortune 100 companies offering traditional defined-benefit plans fell from 89 to 11.

Although 401(k) accounts offer flexibility to workers hopping between jobs, the balances in accounts held by older Americans are shrinking. The median household 401(k) balance for workers nearing retirement age was $111,000 in 2013, a drop of 8 percent since 2010, according to the Center for Retirement Research at Boston College. The 401(k) may have made corporate boards happy, but most middle-income workers would gladly pass up the thrill of picking their own index funds in favor of guaranteed retirement income.

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