BOSTON (TheStreet) -- Americans with 401(k) retirement plans lost about $1 trillion in the stock-market crash. There was no hiding -- few mutual funds were spared.
The latest bear market, following a tumultuous three-year decline earlier in the decade, has hobbled investors, setting back many to where they were more than 10 years ago. As a result, 401(k) plans' inherent deficiencies were exposed, prompting lawsuits, government reviews and proposals for a new way to save for retirement. The 50% rise in the S&P 500 Index during the past few months has hardly helped.
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Since they were established in 1978, 401(k)s have grown in popularity and prominence. But the three-decade honeymoon seems to be over. On top of investment declines, there was plenty of insult to add to the injury.
Companies began slashing matching contributions, which once soothed the sting of lost pensions. Participants realized that, on paper, they had control over investment options, but were handcuffed by what was available and their own lack of financial literacy. Exorbitant fees mopped up tens of thousands of dollars of a lifetime of saving.
What gets lost in all of this is that 401(k)s were never intended to be a primary retirement vehicle. So what now?
In Washington, the Obama administration is proposing to improve retirement plans by making sure more people participate. The president is calling for automatic enrollments for companies with 401(k) plans. Any business with 10 or more employees that doesn't offer a plan would be required to automatically deduct contributions into an IRA account.
There are more radical plans being bandied about. Teresa Ghilarducci, an economics professor at The New School for Social Research in New York, created a stir with her proposal that the whole system be eliminated and the estimated $80 billion a year in tax breaks the government pays be used to kick-start new "universal" plans. The plans would invest in Treasury bonds indexed at 3% over the rate of inflation and offer a structured annuity payout.
Not everyone is ready to give up on the 401(k). Michael Doshier, vice president of marketing for Fidelity's Workplace Investing Group, defends them while acknowledging they're in need of a "tune-up."
"The basic framework is solid," he says. "The 401(k) is vital and viable, but there are clearly some things that we could fix."
He praises the system for being resilient enough to withstand even the recent gut punch of a powerful recession and still be able to provide retirees with the 50% to 85% income replacement they need.
He said Boston-based Fidelity recently surveyed 1 million customers who, over five years, continued to make contributions. Even with the recent downturn, the average account balance managed to show a 35% increase.
