In an unforgiving market, many low-cost "balanced" mutual funds split 60/40 between stocks and bonds lost 22 percent or more of their value last year, shriveling the 401(k) account balances of even well-diversified workers.
Those heavily invested in stock funds - or the single, sinking stock of their employer - lost even more. Many near retirement age will have to keep working for years.
In response, calls have intensified for changes in these employer-sponsored retirement plans, including proposals for the government to guarantee minimum investment returns.
I don't take sides on matters of public policy. I do believe it's a copout to blame any 401(k) plan shortcomings for our mistakes (or inactions) in saving for retirement.
Workers with access to a 401(k) plan decide whether to participate, how much to contribute up to a legal limit and what investments to pick among those offered. Employees, not employers, bear the investment risk.
When stocks soared in the late 1990s, few people paid much attention to valid criticisms of 401(k)s, including often opaque fees. That changed in 2008, just as new Department of Labor rules went into effect.
Under these rules, employees who don't "opt out" can be automatically enrolled in 401(k)s and their contributions invested in diversified portfolios of stocks and bonds. Before, if the employee made no investment choice, contributions would go into less risky but historically low-returning money market or stable-value funds.
The new rules addressed the common criticism that 401(k)s force American workers to become investment managers even if most lack the knowledge, discipline or desire for the task. Almost a fourth of eligible employees don't enroll in 401(k)s and only about one in 10 contributes the maximum. Most fail to diversify properly, being too conservative or too aggressive.
Besides being the default option, the widely recommended diversified funds also became the active choice of many workers. Then came one of the worst years ever for stocks and corporate bonds, showing that even diversified funds can suffer heavy losses.
"The basic fragility of 401(k)s was exposed by the current financial crisis," said a paper co-authored by Alicia Munnell, director of the Center for Retirement Research at Boston College and a long-time critic of 401(k)s. Even with long-term diversified investments, the income such investments can generate in retirement will "vary dramatically" depending on how stocks perform during the particular period being measured, the paper concluded.