The heightened volatility the markets experienced during the first quarter continued during the second quarter. The stock market was very choppy as fears of an interest rate hike by the Fed combined with mixed economic data to leave investors unsure of what the future holds. Once again, problems in Greece are causing anxiety around the world as the European Union tries to hammer out a compromise to bail them out of their extreme debt. With a Fed rate hike looking more likely, bonds sold off across the board causing interest rates to move markedly higher.
It is doubtful that many of you know the name Ted Benna, although it is certain that all of you know what he created. Ted Benna is known as the father of the 401(k) plan. Back in the late 1970’s, Mr. Benna worked as a benefits consultant helping businessmen design retirement plans. He grew frustrated because many of the companies that hired him wanted him to design retirement plans that helped their top professionals at the expense of their lower paid employees.
While designing a plan, he noticed that section 401(k) of the tax code, which was a part of the 1978 Tax Reform Act, could allow employees to make pre-tax contributions to a retirement plan and also allow the company to make matching contributions. The tax code language did not specifically allow for this, but did not exclude it either. He was the first to see this and, amid much skepticism, designed the first retirement plan that we now know as the 401(k) plan. The IRS provisionally approved the plan in 1981, and gave it the official go ahead in 1982. Official regulations were not issued until 1991.
While most people would agree that 401(k) plans are not perfect, they are becoming an increasingly important part of American worker’s retirement income. Over 50% of American workers are now covered by a 401(k) plan. A large portion of the assets we manage at Wabash Capital are in 401(k) plans or are rollover accounts from a 401(k) plan. As these plans continue to evolve they will become a much larger piece of the retirement pie.
While both the stock and bond markets are nervous about higher interest rates and what that will do to security prices, it is worth noting that eight of the last nine times the Fed has raised interest rates, the stock market has risen over the following twelve months. We expect continued volatility and a possible price adjustment in the near term, but longer term economic growth and the bull market both look secure.