This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off.

The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at the 401(k) system and how it can be fixed.

First case in point: It is very difficult for individuals inexperienced in investing to save enough, assemble an appropriate portfolio and systematically reallocate it.

As Alicia H. Munnell, director of the Center for Retirement Research at Boston College, puts it, "I find having it all up to individuals doesn't make sense."

Of course, automatic enrollment, defaults and target-date funds make up for some of these limitations, but with only 50 million U.S. workers participating in 401(k) plans, with a total of $2.3 trillion saved, the 401(k) is clearly vastly underutilized. Not only are people not saving enough, but industry assets are obviously far short of where they should be.

Put into more personal terms, the average 401(k) account balance is less than $46,000 and the median value is a mere $12,655, according to the Employee Benefits Research Institute.

Further, 54% of those who have saved for retirement have less than $25,000 saved, and 27% have less than $1,000.

While target-date funds took heat after one 2030 fund plummetted 41% in 2008, investors have, overall, done well in these funds. Morningstar found that target-date funds have actually outperformed balanced offerings across the board in the past three years (See "Week in Review," page 4). The average 2035 fund lost 1.93%, while the average balanced fund lost 2.77%.Further, Morningstar found that those companies that went ahead and answered calls to reduce equity exposure in their target-date funds saw these funds suffer steep losses in 2009.

Second case in point: The recession prompted many employers (or gave them the excuse) to stop matching contributions, making it even harder for workers to adequately prepare for retirement.

The third major improvement to 401(k) plans: Annuities, possibly automatically allocating half of a retiring worker's savings to an immediate annuity (see related stories in "Week in Review," page 4). This way retirees would have at least some guaranteed lifetime income.

(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.

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