The 401(k) retirement plan was authorized by the Revenue Act of 1978, which took effect in 1980, but its real genesis was in the 1974 Employee Retirement Income Security Act (ERISA), which fixed the problem of underfunded defined-benefit plans so thoroughly that private employers stopped offering them. Benefits consultant Ted Benna came up with a way to use the 1978 act to create a tax-deferred, defined-contribution plan—and the rest is history.

The tax advantage of a 401(k) depends on four factors, all of which have changed dramatically since 1980, to the detriment of 401(k)s. For a median-income married couple with two children:

• The marginal federal income tax rate was 43 percent in 1980. It's 12 percent today.
• The capital gains tax rate was 28 percent in 1980. It's 0 percent today.*
• The tax rate in this family's likely retirement income bracket was 15 percent in 1980; it's 12 percent today.
• Interest rates in 1980 were around 15 percent, compared with 0 percent today.

Making some reasonable assumptions about workers with 30 years until retirement, the 1980 version of the 401(k) tax deferral was equivalent to an additional investment return of 9.2 percent per year. That created an extraordinary incentive to save for retirement, even without an employer match. Using today's numbers, the same benefit comes out to 0.6 percent, which is considerably less than the 1 percent to 2 percent that investors pay in annual fees for the typical 401(k) plan.