By Dolores Kong
The Boston Globe

When Sharon Hingley started working behind the counter
of McDonald's as a teenager, retirement was the
furthest thing from her mind.

But a few years later the fast-food company became one
of the first in the nation to offer a new retirement
savings plan called a 401(k), and she was
automatically enrolled in the plan like all other
eligible employees, despite her youth.

Now Hingley is an operations manager overseeing 10
corporate- owned McDonald's restaurants in
Massachusetts, and her 401(k) retirement account has
grown substantially in the nearly two decades she has
been participating. "I think it's an outstanding
benefit," she said.

Tuesday is 401(k) Day, and this year it marks the 20th
anniversary of the plan. With more than 30 million
participants and $1.7 trillion in tax-deferred assets,
the savings plan that many are banking on to help
secure their golden years has come a long way from its
humble beginnings - as a creative interpretation of
the tax law that wasn't confirmed until an Internal
Revenue Service ruling in November 1981.

That happy accident made "the 401(k) . . . a great
story of unintended consequences," said David L. Wray,
president of the Profit Sharing/401(k) Council of
America, a Chicago-based nonprofit association that
advocates for increased retirement savings through
401(k)s and similar plans.

The plan's popularity has grown along with its assets.
Among the employers big and small offering 401(k)s:
large multinationals like McDonald's, financial
service firms like State Farm Insurance, technology
companies like Terra Lycos, and nonprofits like PSCA.
But the story of the 401(k) is not necessarily one of
unqualified success.

In the days of the traditional pension, or so-called
defined benefit plan, employees who retired after many
years of service could usually count on a guaranteed
benefit until they died. The responsibility - and the
risk - of investing to pay that required benefit fell
to the employers.

Now, with companies moving away from traditional
pensions and toward 401(k)s and other so-called
defined contribution plans, the responsibility and the
risk fall squarely on employees' shoulders. There are
no guaranteed benefits, only whatever an individual
saves and invests, and whatever the investments

"The whole system is moving toward . . . increased
individual responsibility," said Dallas Salisbury,
president of the Employee Benefit Research Institute,
a nonprofit public policy research group.

Savvy savers and investors will take charge and most
likely do well with this increased responsibility for
retirement. But whether everyone is up to the task of
managing their money in what can be volatile markets,
and whether 401(k)s will ultimately add to the
nation's overall retirement security, remain among the
big unanswered questions, say some researchers and
policy specialists.

"401(k)s have definitely grown tremendously in the
last 20 years. No one will argue with that. But
there's some controversy over whether they've been
successful," said Brigitte C. Madrian, associate
professor at the University of Chicago Graduate School
of Business, who has studied 401(k) participant

"They've certainly been successful in that they've
grown. The more important question is, have they been
successful in providing the type of retirement
security that people need? I don't think there's a
substantial consensus about that," she said.

Among some of the findings that raise questions about
the success of 401(k)s:

About 20 percent of workers who are eligible for the
plan do not participate, according to estimates by the
US Department of Labor.

While the percentage of workers not participating has
steadily declined, some retirement policy specialists
worry that those people who will need 401(k) savings
the most - low- to moderate-income workers - are the
ones least likely to contribute. An increasing number
of companies are now automatically enrolling people in
401(k)s, however, which should boost participation.

Various studies find troubling investing behavior by
401(k) participants. A report last year by Harvard
University's David Laibson suggests that participants
with Internet account access dramatically increase
their trading and portfolio turnover, which could hurt
performance. Another study, also last year, by the
University of Chicago's Madrian, found that people who
are automatically enrolled by their employers in a
401(k) plan tend to stick with whatever the default
contribution rate or asset allocation is, even if it
is not necessarily the one that works best for them.

Arguing for the 401(k) as a success story are these

Average account balances in the plans have grown over
the years as a result of new contributions and a
rising stock market. The first one-year decline in
these balances, a drop of only 0.1 percent, to
$58,774, occurred in 2000 because of the market
decline, according to a study released a few weeks ago
by EBRI and the Investment Company Institute.

A 1999 study by Massachusetts Institute of Technology
economics professor James M. Poterba projects that by
the time people in their 30s reach retirement age,
many of their 401(k) balances would represent nearly
as much retirement wealth as Social Security would,
and in some cases up to 2.5 times more.

"When the peak of the baby boomers start retiring in
2025, there's going to be about 10 times as much on
average in 401(k) plans than there is now," Poterba

But no matter how much debate may swirl about the
401(k), the retirement savings plan is a fact of life
for millions of Americans. And the focus on this 20th
anniversary, say the plan's supporters, should be on
the improvements that have been made, and can still be
made, to the plan.

In 2002, for instance, as a result of the new tax law
signed by President Bush, the annual contribution
limit to 401(k)s is increasing from $10,500 to
$11,000, gradually going up to $15,000 by 2006.

The next big improvements to be made are in investment
options and advice, say Ted Benna, who was one of the
earliest to creatively interpret the tax code and
calls himself the "father of the 401(k)," and J.
Spencer Williams, chief executive of Persumma
Financial, a financial services company based in

"We basically need to move to where employees have
total choice and control, and reduce the cost," said
Benna, who is an adviser to Persumma. "The outcome can
only benefit society as a whole, because we do have
problems with Social Security," said Williams, whose
company is one of a growing number offering 401(k)
advice for a price.

Indeed, some financial services firms are waiting
either for a change in federal law that currently
restricts the advice that can be given to 401(k) plan
participants, or for the creation of private Social
Security investment accounts - two big topics of
debate in Washington right now.

But for William G. Gale, a Brookings Institution
senior fellow who has researched the effects of 401(k)
plans on household wealth, the unlimited choice that
some may be advocating is not necessarily the way to

"I think you can go too far in giving people so many
choices regarding mutual funds, that it can be

For McDonald's employees like Hingley and Nancy
Wright, who have participated for nearly two decades
in their corporate plan and have seen their retirement
savings grow, there's plenty to celebrate on this 20th
anniversary of the 401(k).

Some employees of the Golden Arches have built up
six-figure nest eggs by using the company's plan,
which gives participants a match of 50 cents on the
dollar, up to 6 percent of salary, said Wright, human
resources manager for McDonald's in New England.

"They appreciate the whole program," said Wright.
Whether the stock market is momentarily up or down,
employees know that they're saving and investing for
the long haul, and that over time, the account balance
will grow.

"They get their statements and they're really happy,"
she said.