It's starting to look like 401(k) plans will go down in history as a costly failure. In fact, the abandonment of old-fashioned pension plans is likely to leave many Americans poorer in their old age.

Evidence shows that as 401(k)s have taken hold, employees have lost ground in their retirement savings -- even during one of the greatest bull markets in history.

In the last 10 or 15 years, companies have increasingly pushed the burden of managing pensions onto their workers. During the market's boom years, workers rarely complained. Indeed, few regretted the disappearance of defined-benefit plans in an era in which 401(k) plans offered access to double-digit stock market gains.

Now it's clear that many employees either can't afford to make adequate contributions or don't understand that they must. In 2001, fewer than 7% of 401(k) participants contributed the maximum allowed amount to their plans, according to Cerulli Associates, a fund consulting group.

Moreover, because the average U.S. worker has little training in financial planning, some have assumed far too much risk, while others have invested too cautiously -- and both moves damage long-term returns.

Granted, not everyone has lost out with 401(k) plans. Employees with high incomes, financial know-how and an interest in investments stand to benefit from a system of self-managed retirement accounts. But few people fit that profile.

Retirement Savings: Facing a Shortfall

Surprising as it may seem after a decade of prosperity, Americans on the verge of retirement actually have less money saved now than 15 years ago. For those aged 47 to 64, inflation-adjusted median retirement wealth -- including defined-contribution plans, defined-benefit plans and the value of Social Security benefits -- actually fell by 11% between 1983 and 1998, according to a study by New York University economist Edward Wolff.

Yet for the same age group,

average

retirement wealth rose 4%. In other words, over the last 15 years, wealthier people gained retirement wealth, the less affluent lost it.

It's no coincidence that in the meantime, 401(k)s were elbowing out defined-benefit plans as the retirement plan of choice. By 1998, well over half of workers close to retirement owned a 401(k).

"401(k)s are good if you can accumulate a lot of money, but medium-wage workers just haven't accumulated as much. Lower-income workers did much better under

defined-benefit plans," says Wolff.

Meet Your New Pay Cut, the 401(k)

Given their unimpressive track record, how did 401(k)s get to be so popular in the first place? It helped that the plans became widespread in the '90s, amid a period of double-digit stock market gains. Back then, 401(k)s were touted as a means to access potential stock market riches -- unlike defined-benefit plans, with their stodgy guaranteed payouts.

401(k)s also offered portable benefits, letting workers take their retirement funds with them if they changed jobs.

But at least as important as their appeal to workers was that 401(k)s saved employers money. "401(k) plans in general are seen to be cheap because the company doesn't have to make as large contributions," says Annika Sunden, associate director for research at Boston College's Center for Retirement Research.

Under a defined-benefit plan, a typical company might pay an average of around 8% of its payroll into a pension account, with individual payouts based on a retiree's salary and tenure at the firm. But with a 401(k), a company could pay benefits of anywhere between 3% of payroll, if it provides a match to employee contributions, to nothing at all.

By switching from defined-benefit plans to 401(k)s, companies have effectively cut worker benefits. But there's little evidence that they have simultaneously raised wages to offset that effect.

Moreover, in line with the faltering economy, companies have cut the amount of money they contribute to worker plans. "401(k)'s are profit-sharing plans. People have forgotten that. When profits decline, company contributions decline as well," says David Wray, president of the Profitsharing/401(k) Council of America, an employer trade association. In a survey of 909 member companies, the council found that their average contributions to 401(k) plans dropped from 3.3% of payroll in 1999 to 2.5% in 2000. Contributions declined further in 2001, though no specific number has been released yet.

The bottom line: Many employees with 401(k)'s aren't saving enough money to retire. A survey by the Employee Benefit Research Institute found that among workers aged 40 to 59, 39% reported savings of less than $50,000. Less than one-fourth have saved $100,000 or more.

Such low totals are not a reflection, however, of declining contributions. Despite the down market, contributions to 401(k)s increased 10% from 1999 to 2000, according to Cerulli. The firm projects that contributions grew another 10.1% in 2001, though the information hasn't been made official.

But partly because of the down market, the average 401(k) account balance declined 0.1% in 2001, according to the ICI.

Social Security Won't Pick Up the Slack

Some folks may be betting that Social Security will come to their aid in retirement. Indeed, almost half of current retirees 60 and older say Social Security is the biggest share of their income.

But the federal program is not likely to be able to pick up the slack in the future. Already, payouts are on the decline. In the 15-year period ending in 1998, the value of Social Security benefits to households with people aged 47 and over declined 11%. Among the reasons: average hourly wages have declined in that period, as have the average hours worked. Also, fewer people are married, and married people reap bigger Social Security benefits.

Moreover, with the very structure of Social Security up for debate, it seems risky for younger workers to expect generous benefits when they reach old age.

As it stands, of course, the tenuous footing of Social Security in the future has grabbed all the attention. But it's becoming clear that many Americans also haven't put enough money aside in their private retirement accounts, the other key component of retirement security.

And unlike the '90s, today there's no soaring stock market to give anyone reason to think insufficient retirement funds could go the distance. "I think the stock market hype really clouded this

retirement savings issue," says Wolff. "The boom largely benefited the rich, but it hasn't really filtered down that much."