As strange as it may seem, 401(k) plans were
created by mistake, and even came under
threat of
elimination in the early 1980s (under
conservative champion Ronald Reagan, no less!).
In 1978, the US Congress passed the Revenue Act of 1978, which was intended to clear up a bureaucratic dispute between the Treasury Department and Congress over the taxation of certain tax deferred retirement plans. This it did, but the new section also seemed to open a door to a new type of plan, referred to technically as a cash or deferred arrangement or CODA.
But few people saw the potential of this new opportunity. The first company to establish a 401(k) plan was the Johnson Companies, an employee benefits consulting firm part owned by R. Theodore Benna--now referred to as "The father of the 401(k)." It was innovative, it allowed employees a more active hand in planning for their own retirements, and (despite some early challenges) it was shown to be legal. The year was 1981.
A few people in the Reagan administration began to sit up and take notice. While they had made a campaign pledge to expand IRAs, this new development--and its potential to decrease tax revenue--took them by surprise. A worried Jack Kemp estimated that the new plans would decrease tax receipts by $4-5 billion per year. These estimates were wrong--the annual shortfall was more than double the expectation.
The next few years saw a 401(k) explosion throughout the country, as companies converted existing plans to this new format. The benefit to business was clear: while they may still have offered matching contributions, the ability to let employees save through elective salary deferrals meant a lower up front cost. Nevertheless, the 401(k) had to weather several legislative challenges. For example, the Tax Reform Act of 1986 severely limited the maximum amount workers could contribute; and the Unemployment Compensation Act of 1992] imposed a kind of "stealth tax" when employess sought to "roll" their assets out of the plans.
But as the years have passed, the old model defined benefit plans have given way to the defined contribution system (primarily represented by the 401(k)), to such a degree that repeal now seems out of the question. And a damn good thing, too.