Bloomberg News We’ve been looking for someone who was involved in actually writing section 401(k) of the U.S. tax code more than 35 years ago, read the e-mail to Richard Stanger. “Yes, that’s me,” he wrote back.
Mr. Stanger was a primary author of a little-noticed piece of a 1978 tax law. At the time, the 869-word insert was lost in the political heat of limits on tax-deductible three-martini lunches, lower capital gains rates and a bipartisan coalition that was rejecting President Jimmy Carter’s proposals. Today, 401(k) is likely the most recognizable number in the Internal Revenue Code.
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As the first 401(k) generation ages — about 10,000 baby boomers turn 65 every day in the U.S. — questions multiply about the adequacy of their finances. Just last week, President Barack Obama proposed a new retirement plan for Americans who don’t have 401(k) plans at work as he warned that Social Security often isn’t enough to rely on.
How 401(k) grew from an insignificant provision into a behemoth that transformed retirement savings and started an industry that holds $4 trillion in Americans’ assets is a study in the sometimes unintended consequences of Washington action. Consider: The initial provision was estimated to have a “negligible effect upon budget receipts.” Now, defined contribution plans are the fifth-biggest tax break for individuals, with an estimated revenue loss to the government of $61.4 billion in fiscal 2014.
“There was absolutely no discussion in ’78 that if you do this, the world is going to change,” said Daniel Halperin, then a senior Treasury official and now a Harvard Law School professor.
The tale of Richard Stanger, who said he hadn’t been interviewed previously about his role, is also a story about accidental actors at historic moments. As Mr. Stanger himself says, if anyone had known how important 401(k) would become, the Joint Committee on Taxation never would have let him, a 28-year-old junior lawyer, write it.
Mr. Stanger is now 63, the same age as Americans worried about their retirement security. He was a three-year-old in Queens, New York, when the fight began over what would become 401(k).
Irving Trust Co. and other New York-based banks had set up profit-sharing plans in which taxes could be deferred. They were accepted by the IRS with formal rulings in 1956 and 1963. Those plans typically covered bonus payments, not a choice about deferring a portion of regular salary.
LAW STUDENT
By 1972, while Mr. Stanger was a law student at Temple University in Philadelphia, IRS officials became co! ncerned about benefits going to top executives. They proposed regulations that would have required immediate taxation of money contributed into the plans in some cases, undercutting the whole concept.
Congress in 1974 then froze the status quo in place for existing plans, effectively promising to set permanent policy and deferring a final decision. This was part of the Employee Retirement Income Security Act, which came to be known as Erisa.
That created a situation where one set of rules applied to existing plans and there was no clear structure for setting up new plans.
Meanwhile, Mr. Stanger was graduating from law school and planning to focus on international taxation. Instead, he became a pension policy specialist after the firm he joined lost its expert to a job at the IRS and needed someone to learn that 1974 law. Mr. Stanger refers to himself as an “Erisa child.”
“It slowly dawned on me that I was an expert on this — and I should leverage it,” he said in an interview in his Manhattan office.
Three years later, at a conference in Chicago, Mr. Stanger ran into Mervin Wilf, his former law professor. Mr. Wilf mentioned a job opening in Washington he had heard about. As a result, Mr. Stanger started working in November 1977 at the Joint Committee on Taxation, the nonpartisan staff that helps Congress write tax legislation and estimates its cost.
In 1978, the Carter administration proposed a law to cut tax rates, add a credit to benefit middle-income taxpayers, limit deductions for business meals and raise taxes on some capital gains. At the time, the thresholds for tax brackets weren’t indexed for inflation, meaning that more people moved into higher brackets each year unless Congress acted.
A bipartisan coalition in Congress resisted the president’s plan and began assembling its own bill, pulling together ideas proposed by a variety of lawmakers.
1978 ACT
The main goal of what became the Revenue Act of 1978 wasn’t retirement savings, ! said form! er Democratic Congressman Jim Jones of Oklahoma, who helped rally support for the plan.
The point, instead, was tax cuts for the middle class and lower levies on capital gains to spur business investment. The legislation countered Mr. Carter’s tax proposal to Congress, so Mr. Jones and Wisconsin Republican Bill Steiger solicited amendments from members on the House Ways and Means Committee to build bipartisan support, Mr. Jones said.
Mr. Jones said Republicans wanted a proposal that would provide incentives for individual retirement savings.
Representative Barber Conable, the top Republican on Ways and Means, suggested the add-on related to profit-sharing plans that became section 401(k), Mr. Jones said. Mr. Conable, who died in 2003, had been talking to businesses such as Xerox Corp. (XRX) and Eastman Kodak Co. that were major presences in his home region in upstate New York.
“I considered it not an expensive proposition from the standpoint of revenue loss, and a supplement to retirement that could catch on, but never be the dominant factor,” said Mr. Jones, now chairman of ManattJones Global Strategies in Washington. “At that particular time in life, it looked like defined-benefit plans would be the order of the day for years and years and years.”
The Carter administration had concerns about the 401(k) provision, though decided to allow it to proceed, Mr. Halperin said.
“Would I like that decision back?” Mr. Halperin said. “I’m not so sure. But there are certainly times when I think it may have been a terrible mistake.”
Mr. Conable’s idea, which he had introduced as a bill, was passed along to the Joint Committee on Taxation — and to Richard Stanger.
Mr. Stanger described his job as the provision’s primary author, to come up with language, work with the drafters and coordinate with the Treasury Department.
PENCILS, PAPER
He would write with pencils and paper or dictate language into recorders, to be trans! cribed by! stenographers. Then he would head over to a conference room in the Cannon House Office Building, across Independence Avenue from the Capitol, to meet with Ward Hussey, the top tax legislative drafter, and other officials to hash out the details of the wording.
The goals: create a structure for these kinds of plans and establish some safeguards, including a definition of “highly compensated” employees who weren’t allowed to benefit unless others did, too.
Mr. Stanger wasn’t the only author of section 401(k), just the technical expert charged with shaping it into its final form. The provision, changed and expanded in the years since, blessed the idea that employees could direct part of their salary into retirement accounts without paying taxes on it up front and established basic r
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