As he approaches retirement age, the man who invented the 401(k) is still working on it.
In January, R. Theodore Benna, 64, founded a small consulting firm, Malvern Benefits Co., that administers 401(k)s for companies with fewer than 1,000 employees. “We see an opportunity here for a quality product,” says Benna. This is familiar turf: Benna was a co-owner of a consulting firm 23 years ago when he created the prototype for the modern 401(k).
To keep costs low Benna has settled in Williamsport, a small town in the Endless Mountains of central Pennsylvania best known as the annual host of the Little League Baseball World Series. His son and two grandchildren live nearby. “We can turn a profit here, partially because of cheaper office space but also because we have access to a hardworking labor pool,” Benna says.
His small-plan administration business works much like many other so-called third-party administrators. Malvern charges employers a flat annual fee that ranges from $1,750 to $3,750, depending on the specifics of the plan; in addition the firm levies a participant fee of between $39 and $50 a person. To sign up clients Benna works with brokers, registered investment advisers and financial planners, who collect either asset-based or flat fees. “If we could go directly to small employers, we would, but almost all small employers work with financial advisers,” he says.
Says Trisha Brambley, whose Newtown, Pennsylvania, firm, Resources for Retirement, consults with midmarket plan sponsors: “So many products in the small- to midsize-plan market are insanely expensive. But Benna’s firm charges reasonable fees and offers a broad selection of funds.”
Malvern’s 401(k) plans pay an average of 100 basis points in total expenses for their fund holdings, whereas most small-plan fees start at 200 basis points and head north.
Currently, Malvern employs six people and serves 44 clients; the firm has a $400,000 401(k), administered in-house and mostly comprised of employee rollovers.
Back in 1981, Benna co-owned Johnson Cos., a small benefits-consulting firm in suburban Philadelphia. One of his clients, Cheltenham National Bank, wanted to replace its cash bonus plan with a profit-sharing plan in which employees wouldn’t have access to the money until they left the bank. Ultimately, the bank’s lawyers nixed the idea. “The lawyers advised the bankers not to do something that had never been done before,” recalls Benna.
The Tax Reform Act of 1978 added paragraph (k) to Section 401 of the Internal Revenue Code, expanding the possibilities for profit-sharing plans. Benna refashioned the idea he had peddled unsuccessfully to the bankers and created a savings plan for his own company. He and partner Edward Johnson met with fellow Pennsylvanian Drew Lewis, president Ronald Reagan’s secretary of Transportation, who arranged for them to present the idea to John (Buck) Chapoton, then
assistant Treasury secretary for tax policy. Their plan was eventually approved by the Treasury Department, and the regulations that came out thereafter endorsed the matching employer contributions and employee pretax contributions.
Their program, the model for today’s 401(k), allowed employees to save up to 6 percent of their pretax earnings and receive tax-deductible matching contributions from their employers. The law permitted earnings on those assets to grow tax-deferred. The 401(k) industry took off a few years later, when mutual fund giants like Fidelity Investments got into the act.
What about Benna’s own retirement savings? “I’m more heavily in stock than I counsel people to be at my age,” the father of the 401(k) says somewhat sheepishly, admitting to a 90 percent weighting in equities in his 401(k).
“I don’t see bonds doing anything favorable in the short term, and in addition my 401(k) is supplemented by fairly sizable real estate holdings.” In Williamsport, Benna owns a farm, a lodge and two small office buildings.
