Why retirement plans are falling short

By now, it is no secret: Many American workers don't save adequately for retirement.

And in most cases, the ever-popular 401(k) plans offered by private businesses will not make up for the inadequacy of a Social Security pension.

In short, 401(k)s are failing many workers, especially younger ones - not because these plans are themselves inadequate, but because Americans are not taking full advantage of them. Consider:

• In 2000, half of working families (51 percent) did not own a private retirement savings account - no 401(k), no 403(b) offered by nonprofits, no Individual Retirement Account, and no Keogh account for the self-employed.

• A quarter of eligible workers do not join such plans, in effect giving up free money their employers would contribute.

• When changing jobs, nearly 60 percent of 401(k) participants cash out their accounts rather than leave it in the plan for retirement use. Such moves incur heavy tax penalties.

These behaviors fall disproportionately on younger workers. Older people about to retire with a standard corporate pension are "pretty much OK," says Alicia Munnell, director of Boston College's Center for Retirement Research and coauthor of a new book, "Coming Up Short; The Challenges of 401(k) Plans." But baby boomers and younger workers may be "ill- prepared," she adds.

Most workers in the United States - 96 percent - are covered by Social Security. But the average retired worker gets $900 a month, a spouse half of that. It is hardly lavish.

And only 25 percent of working families include at least one worker covered by a "defined benefit" corporate pension plan. Like Social Security, these plans guarantee a fixed monthly payment for life.

The proportion of workers with defined-benefit plans has been shrinking as more and more businesses offer 401(k)s to their employees instead. These are termed "defined-contribution" plans because companies and their workers put defined amounts of tax-free money into them. Employers have no responsibility other than to provide a fair contribution. So the level of benefits a worker receives at retirement hangs on the performance of stock and bond funds, or of other investments within a 401(k) portfolio.

In other words, employees assume the risk of poor investment performance, whereas an employer takes that risk under a defined-benefit plan.

So if you are counting on a 401(k) as your financial salvation at retirement, beware! warns Mrs. Munnell. For middle-class families, the 401(k) system may be an inadequate substitute for old-fashioned pensions. Here are some reasons:

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