401(k) Accounts: A Mixed Legacy

For half a century, 401(k) plans have changed how Americans save for retirement. These accounts allow workers to put aside pre-tax money and invest it, veering away from traditional pension schemes where workers had little control and risk was primarily with employers. Originally seen as an additional option rather than a mainstay of financial planning, 401(k)s have far exceeded expectations. However, questions remain about their ability to support future generations in retirement. Here’s a closer look.

Historical Context

Back in ancient Rome, Caesar Augustus introduced a pension system for soldiers, granting them 13 years of pay after 25 years of service. This approach eventually overshadowed land grants. Notably, pensions were mainly for military personnel until the mid-1800s, when some U.S. cities established funds for teachers, police, and firefighters. American Express even created a private pension fund in 1875. By the late 1880s, Germany had begun offering retirement benefits to all citizens once they hit 70, and nearly a century later, 45% of private sector workers in the U.S. had pensions.

The 401(k) Breakthrough

The Revenue Act of 1978 added a new section to the Internal Revenue Code, allowing employees to defer compensation from bonuses and stock options. A benefits consultant, Ted Benna, recognized that this could be leveraged for retirement savings and devised a plan for his banking clients. Initially, the bank was hesitant about its legality, but the idea took off elsewhere, spurred by tax breaks for employers with matching contributions.

Impact on the Economy

Currently, Americans hold a staggering amount in their 401(k)s—about a third of the GDP, translating to roughly $9 trillion in the investment market. Around 70 million people prefer these accounts. Unlike pensions, which can take years to mature and are generally employer-managed, 401(k)s provide individuals the freedom to make their own investment choices. Most investors lean towards “target-date funds,” which are diversified based on their age and retirement aspirations. Still, it’s striking that about half of these individuals are unaware of where their money is actually invested.

Using 401(k)s in Tough Times

These retirement accounts have also become lifelines in challenging situations. In 2024, the percentage of individuals making hardship withdrawals hit an all-time high of 4.8%, significantly up from around 2% prior to 2020. Those under 59.5 faced a 10% penalty for early withdrawals. As noted by the Wall Street Journal, Congress has eased access to these funds, including a period during the COVID-19 pandemic when withdrawals were tax-free under the CARES Act.

Perception of Savings

A recent survey reveals more than half of Americans feel their retirement savings are adequate. However, Fidelity Investments highlights that less than 3% of 401(k) accounts are valued at $1 million or more. In 2024, the average contribution sat at $8,800, significantly below that year’s limit of $23,000 (or $30,500 for those over 50). Critics argue that 401(k)s primarily favor high-income investors, often leaving many unprepared for retirement. There’s been some bipartisan discussion about these issues, yet substantial government action seems lacking.

Generational Wealth Disparities

Interestingly, Generation Z has managed to amass three times more in their 401(k)s compared to Generation X back in 1989, according to the Investment Company Institute. Data from Empower shows that individuals in their 50s, generally at their financial peaks, have a median balance of $249,136. Furthermore, over half of baby boomers with Fidelity accounts actively manage their investments, compared to just a quarter of millennials.

Lost Savings

There’s an astonishing statistic: approximately $1.7 trillion—reflecting 24.9 billion average salaries—are tied up in forgotten 401(k)s. This typically occurs when someone changes jobs and fails to roll over their balance into a new individual retirement account (IRA). To address this issue, the Department of Labor has introduced a searchable database to assist in locating lost finances. AARP suggests consolidating accounts whenever transitioning jobs, yet around one-third of those who frequently switch jobs opt to liquidate their 401(k)s instead.

This article appears in the October 2025 issue.