Why retirement plans are falling short

• Participants do not diversify their portfolios. Many employees at Enron put most of their 401(k) money into Enron stock - a bad decision since the company went bankrupt. Beyond such unusual circumstances, almost 60 percent of participants are either virtually all in stocks or all in fixed-income investments, such as bonds or money- market funds.

• Hardly any participants rebalance their portfolios as they age or in response to market returns. In theory, good investment practices call on older workers to put more of their portfolio into conservative investments, such as bonds.

• Upon retirement, nearly all participants fail to buy an annuity that would guarantee them income through retirement, even if longer than usual.

Most people, Munnell says, hate buying annuities because they dislike the insurance companies that usually sell them. "People do not understand the risk of outliving their resources," she adds.

The upshot of such bad decisions is that, as of 2001, families headed by a worker 55 to 64 years old had a median retirement account balance of just $55,000. Converted to an annuity at age 65, this sum would provide a monthly payment of $408 a month, notes a new study by the Congressional Research Service.

What makes this picture especially serious is that even without Congress tinkering with Social Security, this system is destined under current law to become a less important source of retirement income.

At present, note Munnell and Annika Sundén, her coauthor, Social Security provides benefits equal to 41.3 percent of preretirement earnings for the average worker retiring at age 65. That replacement rate will decline to 36.3 percent in 2030 for the 65-year-old. That's because normal retirement age will have risen to 67 by that point, which amounts to a benefit cut.

With increased productivity, US living standards should rise at least 30 percent by 2030. So Social Security pensions, which increase when worker pay goes up, may buy more in the future in an absolute sense. But economic research suggests people's sense of well-being hangs considerably on how they're faring relative to others in society.

"Greater personal saving will be needed for the current generation of workers to maintain their desired standard of living in retirement," the congressional study concludes.

Munnell calls for strengthening the 401(k) system by having workers opt out of plans, rather than opt in as they do today. In other words, plans would automatically enroll all workers, set the contribution level to maximize the employer match, allocate assets to an age-appropriate mix of stocks and bonds, restrict investments in company stock, roll over any cash distributions to another retirement account, and pay retirement benefits as an annuity.

Employees could opt out of those defaults, if they wanted. But more workers might end up saving more money for their future.

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