Ted Benna, the individual credited with creating the modern 401(k) retirement savings plan, has voiced concerns that the existing system is failing many Americans due to rising living costs. Benna advocates for a new employer-funded initiative named Radish, which he believes could provide workers with more immediate income while also facilitating long-term wealth accumulation and potentially aiding in saving for a home down payment.
Benna, often referred to as the 'father of the 401(k),' implemented the first modern version of the plan in 1980, stemming from a provision in the Revenue Act of 1978. The system allows employees to contribute a portion of their salaries to retirement accounts before taxes are deducted, with employers often providing matching contributions. These savings are invested and grow on a tax-deferred basis until withdrawal, typically after age 59½.
However, Benna now argues that the requirement for employees to contribute from their paychecks is unsustainable for many. "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 stated, highlighting the increased need for funds for essentials like housing, education, and healthcare. He noted that a significant portion of the population currently has no invested assets.
The proposed Radish program, which Benna helped co-create, aims to supplement, rather than replace, the 401(k). Under this model, employers would contribute funds to employee retirement accounts as rewards for achieving performance goals. This approach, according to Benna, would allow employees to receive contributions without reducing their take-home pay, thereby increasing disposable income available for immediate expenses or savings goals, such as a down payment on a home.
Benna estimates that employers could contribute between $1,000 and $5,000 annually to Radish accounts. He suggests that over a five-year period, these accumulated funds could significantly contribute towards the estimated $23,400 median down payment required for a home in the U.S. He also noted that first-time homebuyers might be eligible for relief from certain early withdrawal penalties associated with retirement accounts.
Despite the potential benefits for savings, some financial experts express caution. Evan Mills, a financial advising analyst, pointed out that mortgage lenders primarily assess borrowers based on income, debt levels, and existing savings. Mills suggested that directing incentive pay into a tax-deferred account, as opposed to standard wages, might not significantly enhance borrowing power in the eyes of underwriters. However, he conceded that such plans could still help individuals accumulate assets they might not otherwise acquire.