Meet the Biggest Threat to Your 401(k) Plan: You

"Education costs money, but then so does ignorance." -- Sir Moser Claus

The 401(k) industry is littered with flaws, including hidden fees, conflicts of interest among plan providers and fraudulent behavior among money managers. But these issues pale in comparison to the biggest problem of all: a profound lack of investor knowledge.

Despite a decade of educational initiatives from 401(k) sponsors, providers and nonprofit organizations, Americans still are perilously uninformed about retirement planning, and many aren't saving enough. And as the safety nets provided by companies and the federal government shrink, the economic fate of millions hangs in the balance.

"Financial illiteracy is a monstrous problem in this country," said William Wechsler, vice president of research at consulting firm Greenwich Associates. "The person best suited to manage 401(k) investments is the individual. By any stretch, however, the average person is in no way capable of doing so." (Click here to see if you're a self-destructive 401(k) participant.)

Now, as the movement to address 401(k) investor illiteracy gains momentum, two possible fixes are emerging. First, a growing number of experts are urging that investors get greater access to person-to-person advice and education, without holding companies who sponsor the plans liable for their advice. Legislation that would allow fund firms and employers to offer advice is currently making its way through Congress.

Second, many academics, sponsors and industry professionals are suggesting something more radical -- a form of benign paternalism that takes much of the responsibility for managing the plans away from the individual. This approach includes automatically enrolling employees in plans; setting up a system to take more out of employees' payroll as their salary grows; and opting for a "less is more" approach to 401(k) offerings that runs counter to the "open platform" plans that include hundreds of funds. With the first solution slow in coming, the latter idea has been gaining a surprising following.

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Why the need for such drastic measures? Over the past 30 years, the world of retirement planning has seen a tectonic shift away from defined-benefit plans -- in which the employer takes stewardship of the plan -- in favor of defined-contribution plans such as the 401(k), in which the ultimate responsibility for managing the plan falls to the employees. This shift suited the needs of both employers concerned about costs and liabilities, as well as employees who were changing jobs. However, as this unplanned revolution in retirement plans unfolded, few people realized the implications of letting tens of millions of workers with little investing education take charge of their nest eggs.