The 401(k) System Is Broken, but This Fix Could Help You Build Real Wealth
For decades, the 401(k) has been the go-to retirement savings tool for American workers. It comes with a catch, though: It only really works if you can afford to contribute to it in the first place.
That’s a growing problem in an economy where many households are stretched thin by increasingly stratospheric cost-of-living levels. If every paycheck is already spoken for, setting aside money for retirement can feel more like a luxury than a financial necessity.
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Ironically, one of the loudest critics of today’s 401(k) retirement investment system is the man who helped create it. Per Realtor.com, Ted Benna, often called “the father of the 401(k),” believes that this retirement system increasingly favors higher earners, and he’s proposed a new approach that could help workers build wealth without reducing their take-home pay.
Why the 401(k) Isn’t Working for Everyone
The biggest strength of a traditional 401(k) plan is also its biggest weakness: Employees fund it through payroll deductions. That works well for workers who have some breathing room in their budgets, but for many middle- and lower-income employees, contributing even a small percentage of each paycheck isn’t realistic.
Benna now argues that while 401(k) plans helped turn a lot of “spenders into savers,” he also believes that the system now disproportionately benefits workers with higher salaries who can comfortably set money aside.
Meet Radish: The New Employer-Funded Savings Plan
Benna’s proposed solution to the 401(k) problem is a new program called Radish.
Rather than asking employees to contribute from every paycheck, Radish would allow employers to make contributions into a tax-advantaged account when workers meet performance goals. Those incentives could be paid out annually, monthly or even weekly, depending on the employer.
The broad goal here is to help workers who have never had meaningful assets begin building wealth without forcing them to choose between paying today’s bills and preparing for tomorrow.
Radish differs from a traditional retirement account in that Benna envisions it as more of an emergency savings vehicle rather than a nest egg that’s off-limits until retirement. Workers could potentially tap those Radish funds for shorter-term financial needs rather than waiting 20 or 30 years. Radish seems in some ways to be less about retirement wealth, and more about having financial cushions when life happens.
What the Experts Have To Say
“It looks like Radish is basically a 401(a) profit-sharing plan, which has been around since the 1950s,” George Dimov, founder and CEO of Dimov Partners, told MoneyLion. “The smart thing about Radish is the way it handles taxes. Because the money that the employer puts in does not go through payroll, the company does not have to pay taxes like FICA, unemployment or workers comp. This means that if a company puts $1,000 into Radish it costs them less than if they just gave their employee $1,000 as a bonus.”
Melanie Musson, an insurance and finance expert at Clearsurance, concurred that Radish is a great auxiliary path towards wealth, but it can’t replace a 401(k) plan.
“Radish could be an excellent perk if your workplace adopted it,” she said. “Any extra money you can have access to is a plus. But the point of Radish, even as explained by the creator, is to act as an emergency fund that you can access as needed. That’s great. But it doesn’t replace a 401(k). Even with Radish, you’re going to need to start putting money toward your retirement if you want to retire comfortably.”
The Bottom Line
Whether the 401(k) system is truly broken remains to be seen, but it does have its flaws, especially with regards to the fact that millions of workers simply can’t afford to participate the way it was originally designed.
Benna’s Radish proposal flips the 401(k) equation somewhat by shifting the initial responsibility from employees to employers, allowing workers to accumulate assets without shrinking their paychecks. It’s certainly not a replacement to the 401(k), but for people struggling to save anything at all, building wealth without sacrificing today’s cash flow could be a meaningful step in the right direction.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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