A New System?

In the meantime, retirement experts are looking at the crisis as an opportunity to point out flaws in the system and suggest change. Indeed, the crisis has highlighted problems with all of America's current retirement plans, they say. Defined contribution plans place too much burden on the individual; private sector defined benefit plans place too much burden on the employer; and public sector pensions shift the burden to entire communities of taxpayers and threaten to drag down local economies.

"To me, the health of our retirement system [depends on taking] lessons from the financial crisis and applying them correctly, making sure pension law supports the next innovation," says Watson Wyatt's Glickstein. "The bloom is off the rose to a large degree on the 401(k), and I think there's going to be a renewed interest in coming up with a new retirement plan design."

Glickstein sees room for a hybrid called a cash balance plan, which attempts to incorporate the features of a 401(k) into a defined benefit plan. Others have called for automatic enrollment in the target-date 401(k)s that automatically reallocate investments as an investor nears retirement.

The Pension Rights Center has launched what it calls the Retirement USA Initiative, which is pushing for systematic change. "Even before the current recession, retirement income security had become a major national concern, as companies increasingly shifted away from traditional pensions to do-it-yourself savings plans," the group's Web site says. "In the past six months, the faltering stock market and dwindling 401(k) accounts have turned a major concern into a crisis.... It is critical to start now to lay the foundation for a new system to supplement Social Security for future retirees -- one that is universal, secure, and adequate."

Munnell, of the Center for Retirement Research, has stepped up her calls for a new mandatory, universal savings account that would replace about 20% of preretirement income.

"Placing all the financial risk for the second tier of retirement income on either individuals or on firms does not work," she wrote in a paper published last November. "The private sector is unlikely to revert back to defined benefit plans, where employers bear all the risk. But relying on a system where the individual bears all the risk does not make much sense either. It may be time for the United States to consider other ways of designing a retirement system."

One of the long-term lessons from the financial crisis is the importance of risk management, says Mitchell. "One thing that many baby boomers are probably aware of is that it is going to take much more money to retire." As they see their 401(k) account balances plummet, "people now understand risk in a real, visceral way, more than they ever did before."

In addition, she says, it no longer wise to rely entirely on employers to provide retirement security. "It's really hard to link retirement benefits to an employer who may or may not be there. And that has been brought to the fore by the discussion of the auto companies' potential bankruptcy. As a young worker, you often don't think that this is a promise that may be 100 years long. So it is a real challenge to try to construct both a financial system that can keep long-term promises and a political system to back those promises."

Going forward, Mitchell sees reforming Social Security as one of the most important issues in retirement planning because it is the base on which the rest of America's retirement system is built. "I think the biggest problem is the near insolvency of Social Security," says Mitchell. "The fact that it is running out of money in six or seven years is already putting implicit pressure on retirement plans and everything else. So that's priority one in my book."