NEW YORK ( TheStreet) -- After years of frustrating trial and error, there is good news to report about 401(k)s. The savings system is beginning to work effectively.Most employees are now tucking substantial amounts into their accounts and the portfolios are properly diversified. The improvements are too late to help many older workers who have inadequate savings to support their retirements. But recent changes should go a long way toward ensuring retirement security for people in their 20s and 30s.
The pensions promised fixed monthly payments to retirees. To fund the monthly checks, employers put aside cash and hired professional managers to oversee it. From the employees' point of view, the system worked automatically. Individual workers did not have to worry about whether their retirement plans were managed properly. If pensions faced a shortfall, employers had to make up the difference. Under the 401(k) system, employees had to decide whether or not to save at all. If they did elect to save, the plan participants had to select where to invest the money. Employers could supplement the savings. But if the retirement plans produced skimpy nest eggs, that was the employees' problem. In retrospect, the entire 401(k) strategy was shaky. The system assumed that janitors and clerks could make complicated investment decisions. However, it soon became apparent that even many employees with business degrees lacked the ability or motivation to save enough and invest it properly.