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The Accidental 401(k)

Greg Spears

WHEN I GOT MY FIRST job in 1976, my employer didn’t offer a 401(k) for one simple reason—the plans didn’t exist. By 1985, a new employer did offer one, so I signed on.

Where had the 401(k) come from? Well, I met the man who put the K into the tax code, and he was beyond humble about it. In fact, he’d forgotten all about it.

Barber Conable Jr. graduated at age 19 from Cornell University to join the Marines Corps in World War II. Afterward, he became a lawyer and eventually served 20 years in the House of Representatives, representing my hometown of Rochester, New York.

Conable decorated his office with tomahawks, representing his desire to cut the federal government’s growth. A fiscally conservative Republican, he was appointed to the House Ways and Means Committee, which writes the tax laws. Eventually, he became the ranking Republican, the perfect spot to slip a new section into the massive U.S. tax code.

Years after he’d retired from Congress, Conable was at a meeting at American International Group, where he served on the board. Someone announced that the January 2000 issue of Pensions & Investments magazine had just named him one of 10 runners-up for its men of the century award—because he originated the 401(k) retirement plan.

“Everybody was saying, ‘Barber, you did a wonderful thing!’” Conable told his biographer James S. Fleming soon after. “I said, ‘I don’t think I did.’ This was 20 years after the fact. I finally called the Ways and Means staff and said, ‘Would you check to see if I had anything to do with the 401(k)?’”

“And they called me back and said ‘Yes you did. You changed the law to protect the Kodak pension and profit-sharing plan in such a way that a Pennsylvania [benefits consultant], a year or two later, looking at the tax code, said ‘I could make a pretty good pension plan out of that.'”

Kodak was the largest employer in Conable’s district. It paid every worker a fat yearly bonus, sometimes large enough to buy a new car. Some workers wanted to save their money, and resented losing a big slice to taxes immediately.

As a favor to constituents, Conable—or, more likely, a staffer on the Ways and Means Committee—added a paragraph to a 185-page tax bill that was working its way through Congress in 1978. It created a little tax haven for Kodak’s employees. It said their employer could deposit money—their bonus—untaxed into a trust account on the employees’ behalf. The money deposited wouldn’t be treated as distributed taxable income to the employee.

The Revenue Act of 1978 was signed into law by President Jimmy Carter. Fortunately, someone outside of Kodak noticed the 401(k) provision. Ted Benna, a pension consultant in Newton, Pennsylvania, thought the new section could have broad application. He won approval from the IRS for his concept to use it as a tax-deferred retirement savings plan, and today more than 80 million workers collectively invest $6.2 trillion in these accounts, according to the American Benefits Council.

How could Conable have forgotten about the 401(k)? Well, he was the first to admit he wasn’t big on constituent services. Since this was a favor to local voters, he evidently farmed it out to staff and then promptly forgot about it.

In addition, Conable viewed Social Security—not the 401(k)—as the nation’s vital retirement system. He’d served on Alan Greenspan’s blue-ribbon commission that rescued Social Security in 1983 by gradually raising the full retirement age and increasing payroll taxes. Conable’s success in that job led to another appointment, serving as president of the World Bank.

I interviewed Conable during his tenure at the World Bank about his work on Social Security reform. He struck me as both smart and candid. One thing he said stayed with me. When I asked him why he and other members of Congress had voted for big cost of living increases to Social Security benefits, even when the Social Security trust fund was fast emptying, he explained that “Congress only acts in a crisis.” I’ve seen that play out many times since, as lawmakers let a problem fester until it has to be tackled in an emergency fashion.

Because of his intelligence, I have trouble believing Conable, who died in 2003, had forgotten about the 401(k) because he’d lost a step to age. Instead, I think he just didn’t recognize its huge potential.

As the January 2000 issue of Pensions & Investments magazine noted, “When Rep. Barber Conable, Rochester, N.Y., inserted section (K) into Section 401 of the Internal Revenue Code… little did anyone know the impact it would have.”

Including Barber Conable.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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