With the institutional market -- pensions, foundations and endowments -- in tatters and affluent investors burned by the markets, defined contribution plans are one of the one few brights spots of hopes for asset management firms. Yet, the once-reliable 401(k) may be facing new political risk going into the 111th Congress. The problem is that DC accounts have lost more than $1 trillion on the verge of the baby boom's retirement. And the baby boom has clout in Washington.

A demonstration of the risk is provided in a page one article in Thursday's Wall Street Journal (see "Big Slide in 401(k)s Spurs Calls for Change").

The article by Eleanor Laise documents the "crisis of confidence for millions of Americans who manage their own retirement savings through 401(k) plans" that was ignited by last fall's "stock-market rout." Laise's article is of the type legislators can seize on as it hits the high points of problems in these plans and provides specific examples of people -- names included -- who fell into the various pitfalls.

"There's just no guarantee that when you're ready to retire you're going to have the money. You either put it in a money market which pays 1%, which isn't enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year," says Kristine Gardner, summing up the situation.

The article also finds industry insiders, such as Watson Wyatt's Robyn Credico, who have their own criticisms of 401(k)'s.

"This is the biggest test that the 401(k) plan has seen to date, and it has failed," Credico, who heads defined-contribution at Watson Wyatt Worldwide, told Laise.

Jerry Bramlett, the CEO of BenefitStreet and former CEO of the 401(k) Company (both recordkeeping firms), likens the DC plan market to the "Wild West of 401(k) investing."

"You show up at work, they give you a list of funds and send you on your way," he added.

What are the specific criticisms of 401(k) plans raised in the article?

The plans expose workers to the vagaries of the market at the time of their retirement.

"That seems like such a fundamental flaw. It's so crazy to have a system where people can lose half their assets right before they retire," Alicia Munnell, director of Boston College's Center for Retirement Research, tells the paper.

Workers are "opting out." AARP claims that one in five workers age 45 or older halted contributions to their 401(k) or IRA over the past year.

Employer matches are disappearing. The article cites General Motors Corp. and FedEx Corp. as examples of the trend and points out that one witness at the recent Miller hearings in the House called for plan sponsors to be required to make matches.

Target date funds are failing. The average target date fund lost 32 percent last year (compared to 38.5 percent for the S&P 500). Even worse, the average 2010 fund used by those retiring this year and next dropped nearly 25 percent.

Failure to use index funds. Laise points out that Rep. George Miller (D, California) has called for plans to be required to offer at least one index fund.

"We see very often that the worst-performing funds are marketed at the highest cost to the least sophisticated investors," Miller is quoted as saying. "That's contrary to the national interest to get more people saving earlier and longer."

Too much company stock. A Hewitt Associates survey found that nearly half of plans offer employer stock as an investment. (Caveat: Hewitt's survey reflects its client base in the large plan market. Small employers are less likely to offer this option).

Laise points out that a "universal" plan proposed by David Iwry at the Miller hearing included rules against excessive investment in company stock.

Failure of education.

"Let's face it, participant education has been an abject failure," BenefitStreet's Bramlett told Laise.

Finally, Laise turns to a powerful, number-based argument: workers retiring in 2008 who spent 40 years making the average six percent contribution and investing it in target-date funds would have been able to replace just 28 percent of their income, according to Boston College's retirement-research center.

That is well short of the 51 percent replacement ratio achieved by retirees in 1999. The gap between the two numbers underscores the randomness of the markets and its seeming inequity. 

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