Investment guru gives a bleak update on America's retirement… but it could secretly be a good thing for the housing market

For decades, the 401(k) account has been the cornerstone of retirement planning in America, helping millions of workers save and invest enough money to live comfortably in their golden years.

But now the investing guru credited with dreaming up the account says it's no longer working for the people who need it most.

Ted Benna, widely known as the 'father of the 401(k),' believes soaring living costs have left many Americans unable to afford to make contributions to their retirement accounts at all – and believes the system is failing lower and middle-income workers.

Benna says he's now in favor of a radical new employer-funded plan called Radish that could leave workers with more money in their paychecks today while still helping them build long-term wealth for retirement.

And, perhaps surprisingly, he believes it could also make it easier for first-time buyers to save for a home.

The 401(k) traces its roots back to the Revenue Act of 1978, which created Section 401(k) of the Internal Revenue Code.

At the time, the provision was intended to clarify the tax treatment of deferred compensation, but Benna realized it could be used to allow employees to save part of their salaries for retirement before taxes were deducted.

He implemented the first modern 401(k) plan in 1980, transforming workplace retirement savings in the process.

Today, Americans hold trillions of dollars in 401(k) accounts, making it one of the country's most popular retirement vehicles.

Eligible employees save part of each paycheck in a 401(k) account before income taxes are paid. Employers often match some of those contributions, effectively giving workers extra money toward retirement.

The savings are invested in funds chosen by the employee and grow tax-deferred until withdrawn, typically after age 59½.

The catch is that contributions come directly out of workers' paychecks – something Benna now says many families can no longer afford.

'We've reached a point now where many middle- and low-income employees can't afford to have money taken out of their paycheck,' Benna told Realtor.com.

'In the current economy, more money than ever is needed for essentials like food, education, healthcare and, of course, homes.

'We have a very large segment of the population that has no assets. They've never had an account that's been invested for their benefit.'

Rather than replacing the 401(k), Benna wants employers to supplement it with a new savings program he has helped co-create dubbed Radish.

Instead of asking workers to contribute from their own wages, employers would deposit money into retirement accounts as rewards when employees hit performance goals, whether weekly, monthly or annually.

And the unusual name is no accident. The company says it chose the vegetable Radish as its symbol because it grows quickly, is easy to access when needed and puts down strong roots. Three qualities the business says it offers. 

'Employees will receive contributions without having to have money deducted out of their paycheck,' Benna explained.

For employers, the deposits would function like contributions to a qualified retirement plan, while avoiding certain payroll costs.

Benna believes the approach would encourage saving without reducing workers' take-home pay.

'I want it to be more of an emergency savings type of thing where they could dip into it and access it when they had shorter-term financial needs,' he said.

'That's the way it's designed.'

Benna argues that freeing workers from making retirement contributions themselves could leave them with more disposable income to cover everyday expenses – or save for a down payment.

The average down payment remains a major hurdle for aspiring homeowners.

According to Realtor.com, the median down payment currently sits at around $23,400, while the US personal savings rate recently fell to 2.6 percent, one of its lowest levels in years.

Benna estimates employers could contribute between $1,000 and $5,000 annually into Radish accounts.

'Over a five-year period of time, with money accumulating, you could have what's needed for a down payment,' he said.

'Might not be the only answer, but certainly could help.'

Many financial advisers warn against raiding retirement savings to purchase a home because withdrawals reduce years of potential investment growth.

Withdrawals from a traditional 401(k) are generally taxed as ordinary income, and anyone under 59½ typically faces a 10 percent early withdrawal penalty unless they qualify for an IRS exception.

Benna, however, believes using retirement funds strategically isn't always a mistake.

'The best way to do this is to withdraw the amount needed during January and to complete the purchase in January also,' he said.

'That way the mortgage interest and property taxes should offset the additional income taxes required due to the withdrawal.'

He also noted that first-time buyers may qualify for relief from certain early withdrawal penalties, depending on the type of retirement account and applicable IRS rules.

Not everyone is convinced the proposal would automatically improve home-buying prospects.

Evan Mills, a financial advising analyst at Scholar Financial Advising LLC, said mortgage lenders primarily focus on income, debt levels and savings when assessing borrowers.

'The principle is that debt-to-income is about your monthly debt relative to your qualifying income,' Mills explained.

'Routing incentive pay into a tax-deferred account rather than taking it as standard W-2 wages generally isn't going to help your borrowing power the way a normal raise would, because that raise would show up in the gross income underwriters look at.'

However, he agreed the plan could still help workers build assets they may never have otherwise accumulated.