The 401(k) might not be the perfect retirement savings vehicle, but it’s about the best thing we have at the moment. Still, how can you be sure that yours has enough to get you through a secure retirement? By taking full advantages of all the many benefits that the 401(k) affords.
What are 401(k)s all about? Named after a section of the U.S. Internal Revenue Code (yee haw) and introduced in 1980, the 401(k) is a tax-deferred savings plan that workers can contribute to through automatic payroll withholding. Often employers match some or all of those contributions, supercharging the balance over time.
The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.
(It’s worth noting what the 401(k) replaced, which was the somewhat common practice among employers of giving their employees the option of straight cash payments instead of employer-paid contributions to their tax-qualified retirement plan accounts. That’s now illegal.)
What’s the concern?
According to the National Institute on Retirement Security, nearly 75% of Americans believe that we’re in the middle of a “retirement crisis,” with 65% predicting that they will likely have to work past retirement age (see the story above).
Millennials are the most pessimistic about this, but concerns about running out of money in retirement cross the generations.
401(k)s aren’t perfect. There’s room to maximize them. But there’s no question, during this 40-year stretch, we’re a lot better off in terms of people (being) in position to retire than we would have been without it.” — Ted Banna, the “father of the 401(k)
A little bonus history: “401(k)s aren’t perfect. There’s room to maximize them. But there’s no question, during this 40-year stretch, we’re a lot better off in terms of people (being) in position to retire than we would have been without it.” — Ted Banna, the “father of the 401(k)”

Getting the most out of your account:
It’s not complicated, you just have to follow the rules that the tax code lays out and make sure you’re maxing out everything that can be maxed out in your account.
- Save early, save often: Even Ted Banna admits that the most important benefit of the 401(k) isn’t the tax savings but the fact that it’s a forced savings vehicle. When you set up automated withdrawals from your paycheck you don’t even see the money before it goes into your account. That makes it easy to automate your savings and make sure you don’t spend it carelessly.
- Watch your fees: One of the common criticisms of 401(k) plans offered by employers is that they come with a lot of hidden fees, and it’s true that the costs can really add up. It’s important to actually read the documentation that comes with your plan and understand how you’re being charged and what you can do to mitigate those fees. Sometimes it’s as simple as changing up your investment mix to cut down on your costs, and those small moves can add up over the years.
- Don’t overthink it: The 401(k) is the perfect embodiment of the importance of time in the market being more valuable than timing the market. Don’t go too crazy with your retirement investments, stay the course and save regularly over the course of your career and you’ll be in good shape once you’re ready to take off.
My take: Listen, no one knows the 401(k) better than the guy who invented it, and (like it or not) this model has worked fairly well for over 40 years. It’s not going away anytime soon, and a well managed account will serve the needs of most retirees provided they save appropriately and manage their costs.
Oh, and I don’t even need to tell you about the risks of early withdrawals, right?