Chalk up one another big black mark against the beleaguered 401(k). After 38 years, the state of Nebraska has recently jettisoned its version of the retirement plan, judging it a failure.

It's too early to gauge the reverberations from the Nebraska decision. But it could mark the quiet beginnings of a backlash against the notion, popularized over the past decade, that ordinary Americans should put on money manager hats and assume responsibility for their retirement security.

The Nebraska case shows the disastrous results of letting people manage their own retirement funds over the long term. The state began letting workers opt out of its traditional pension plan to invest in a defined-contribution plan back in 1964. By comparison, most company 401(k) plans have been in existence only since the 1990s. Until recently, a booming stock market has helped camouflage their flaws.

Lessons Learned

In the wake of nearly four decades' experience with the plans, Nebraska's decision offers proof that the average employee lacks the knowledge -- and perhaps just as important, the interest -- necessary to invest for retirement on their own. A state study conducted in 2000 found that over 30 years, the typical worker posted an average annual return of 6% to 7%. By comparison, money managers running the state's old-fashioned defined benefit plan boasted average returns of 11%.

People enrolled in the defined-benefit plan wouldn't actually get to take home that 11% return because their benefits would be based on their salaries and years of service. But the disparity highlights the problem in expecting bus drivers or schoolteachers to invest as effectively as professionals.

"The point is that the professional money manager -- i.e., our investment council -- had a better return than what the individual participant could realize by his own allocation of assets," says Anna Sullivan, executive director of the Nebraska retirement system.

Moreover, Nebraska state employees posted weak returns even though the state made plenty of efforts to help them invest wisely. In fact, they were better prepared to handle their responsibilities than the average 401(k) investor, who can count on little help from his employer.

The state required all employees to contribute money from of their monthly paychecks to invest in their retirement accounts. Factoring in state matching contributions, most workers contributed 10% to 11% of their income.

By comparison, employees of U.S. companies aren't required to invest anything at all in a retirement account. Though the average worker puts 5.3% of his paycheck into a 401(k), according to the Profitsharing/401(k) Council of America, 401(k) contribution rates vary widely.

Nebraska also tried to help workers learn about the stock market. They could take time off from work to attend daylong educational seminars. That's a far cry from the situation at most U.S. employers, which offer little or no financial advice.

Still, those efforts failed to spur much interest in investing among rank-and-file Nebraska workers. In fact, half of all money in workers' accounts ended up in the default investment (used for those who didn't specify any other option), a guaranteed investment contract (GIC) fund. And though the state offered 11 fund choices to make it easy for workers to diversify their accounts, 90% of the money went into only three funds.

As a result, mounting evidence showed that employees weren't benefiting from the plan. Because returns were so low, Nebraska administrators grew concerned that the state was wasting taxpayer money via matching contributions to workers' accounts, says state retirement system director Sullivan.

Though current employees can choose to stay in the 401(k)-style plan, starting in January new hires will have to enroll in a cash balance plan. (Cash balance plans are a variation on pension plans that allow workers to take accrued benefits with them if they leave a job before reaching retirement age).

The Cornhusker State: Setting the Trends?

It's not yet clear whether the Nebraska decision is a harbinger of a deeper backlash against 401(k) plans. But it offers an illuminating case study in the risks of giving investing responsibilities to workers. Forty years of lousy returns, under the best of conditions, don't speak well for 401(k)s.

For the near term, at least, Nebraska's move could forestall the spread of 401(k)-style plans among the nearly 5 million state employees nationwide.

Presently, almost all states still have old-fashioned pension plans. But recently Florida, which claims the fourth-biggest retirement system among the states, decided to offer workers the option of switching from its existing pension plan to a 401(k)-style plan. They'll be allowed to make their selection starting in June.

In the meantime, opponents of the shift are already arguing that many employees will reject the 401(k)-style plan. Of the roughly 1.5% of Florida employees who were allowed to vote early, nearly 90% opted for the pension plan.

To be sure, many of the people who voted early had worked for the state for a long time, so would be expected to support the option that rewards years of service. As a result, their votes aren't necessarily representative of what the final tally will be.

But the state's largest union says it's not surprised by the weak reception. In its view, most workers would lose out under a 401(k)-style plan.

"The fundamental reason is it doesn't guarantee retirement security," says Rich Ferlauto, director of pension investment policy for the American Federation of State, County and Municipal Employees. "The risk is totally placed on the employee, and there's no benefit they can rely on at retirement."