Investing Guru Warns America’s Retirement System Is in Deep Trouble

For more than 40 years, the 401(k) has sat at the heart of retirement planning in the United States, giving millions of American workers a tax-advantaged way to save and invest for life after work.

Now, however, the investment expert credited with helping bring the 401(k) into the mainstream says the system is no longer serving many of the people it was meant to help.

Ted Benna, often described as the “father of the 401(k),” argues that the rising cost of living has made regular retirement contributions unaffordable for many households. In his view, lower- and middle-income workers are increasingly being left behind by a retirement savings model that depends heavily on employees having spare income to invest.

Benna is now backing a major rethink: an employer-funded retirement plan known as Radish. He says the approach could allow workers to keep more money in their paychecks today while still giving them a path to build long-term wealth for retirement.

In a twist that may surprise some savers, Benna also believes the plan could help first-time buyers put money aside for a home more easily.

The 401(k) was born out of the Revenue Act of 1978, which added Section 401(k) to the Internal Revenue Code.

The provision was originally designed to spell out the tax rules for deferred compensation. Benna, however, saw a much broader opportunity: employees could defer part of their pay into retirement savings before taxes were taken out.

In 1980, he put that idea into practice by launching the first modern 401(k) plan, reshaping workplace retirement saving across America.

Today, Americans hold trillions of dollars in 401(k) accounts, making it one of the country’s most popular retirement vehicles.

Eligible employees save part of each paycheck in a 401(k) account before income taxes are paid. Employers often match some of those contributions, effectively giving workers extra money toward retirement.

The savings are invested in funds chosen by the employee and grow tax-deferred until withdrawn, typically after age 59½.

The catch is that contributions come directly out of workers’ paychecks – something Benna now says many families can no longer afford.

‘We’ve reached a point now where many middle- and low-income employees can’t afford to have money taken out of their paycheck,’ Benna told Realtor.com.

‘In the current economy, more money than ever is needed for essentials like food, education, healthcare and, of course, homes.

‘We have a very large segment of the population that has no assets. They’ve never had an account that’s been invested for their benefit.’

Rather than replacing the 401(k), Benna wants employers to supplement it with a new savings program he has helped co-create dubbed Radish.

Instead of asking workers to contribute from their own wages, employers would deposit money into retirement accounts as rewards when employees hit performance goals, whether weekly, monthly or annually.

And the unusual name is no accident. The company says it chose the vegetable Radish as its symbol because it grows quickly, is easy to access when needed and puts down strong roots. Three qualities the business says it offers. 

‘Employees will receive contributions without having to have money deducted out of their paycheck,’ Benna explained.

For employers, the deposits would function like contributions to a qualified retirement plan, while avoiding certain payroll costs.

Benna believes the approach would encourage saving without reducing workers’ take-home pay.

‘I want it to be more of an emergency savings type of thing where they could dip into it and access it when they had shorter-term financial needs,’ he said.

‘That’s the way it’s designed.’

Benna argues that freeing workers from making retirement contributions themselves could leave them with more disposable income to cover everyday expenses – or save for a down payment.

The average down payment remains a major hurdle for aspiring homeowners.

According to Realtor.com, the median down payment currently sits at around $23,400, while the US personal savings rate recently fell to 2.6 percent, one of its lowest levels in years.

Benna estimates employers could contribute between $1,000 and $5,000 annually into Radish accounts.

‘Over a five-year period of time, with money accumulating, you could have what’s needed for a down payment,’ he said.

‘Might not be the only answer, but certainly could help.’

Many financial advisers warn against raiding retirement savings to purchase a home because withdrawals reduce years of potential investment growth.

Withdrawals from a traditional 401(k) are generally taxed as ordinary income, and anyone under 59½ typically faces a 10 percent early withdrawal penalty unless they qualify for an IRS exception.

Benna, however, believes using retirement funds strategically isn’t always a mistake.

‘The best way to do this is to withdraw the amount needed during January and to complete the purchase in January also,’ he said.

‘That way the mortgage interest and property taxes should offset the additional income taxes required due to the withdrawal.’

He also noted that first-time buyers may qualify for relief from certain early withdrawal penalties, depending on the type of retirement account and applicable IRS rules.

Not everyone is convinced the proposal would automatically improve home-buying prospects.

Evan Mills, a financial advising analyst at Scholar Financial Advising LLC, said mortgage lenders primarily focus on income, debt levels and savings when assessing borrowers.

‘The principle is that debt-to-income is about your monthly debt relative to your qualifying income,’ Mills explained.

‘Routing incentive pay into a tax-deferred account rather than taking it as standard W-2 wages generally isn’t going to help your borrowing power the way a normal raise would, because that raise would show up in the gross income underwriters look at.’

However, he agreed the plan could still help workers build assets they may never have otherwise accumulated.