As the market melted down in 2008, many investors were so horrified at the state of their 401(k) statements that a number of them just stopped looking altogether. Now is the time to figure out how to fix a broken retirement system and explore the role exchange traded funds (ETFs) can have in it.

The importance of the 401(k) has only grown in recent years. A growing number of people entering into retirement (especially now that the Baby Boomer generation has begun to enter the ranks of retirees) and a broken social security system means that now more than ever, we’re responsible for the money we take with us into our golden years.

The average age of retirement in the United States is 63, but recent statistics show that it might not be as comfortable as most had hoped. Last year, Americans lost 18% of their net worth, according to a story by David Wyss for BusinessWeek. The Center for Retirement Research estimates that 43% of Americans are considered “at risk,” which means that they’d be unable to keep up their current standard of living after they retire.

Even worse, few Americans are taking decisive action, either by saving, paying off debt or taking advantage of tools such as 401(k)s that are being made available to them.

A Broken System

Americans historically have relied on social security to fund their retirements, but fewer and fewer people can count on this. Many projections suggest that both Social Security and Medicare are going to run out of money within the lifetime of most Baby Boomers, Wyss’s story suggests. And company pension plans are slowly moving toward extinction, too.

Saving for retirement has been a growing problem, and in recent years it’s only become worse. At the end of 2007, the median household in the 55-to-64 age group had total financial assets of just $72,400, according to the 2007 Survey of Consumer Finances. That figure may be even lower after the market meltdown.

This makes the 401(k) more important than ever. Unfortunately, it’s a broken system, which we’ll go into in more detail in the next section. But the good news is that there are solutions out there – it’s just going to require a little noise-making to get it done.

The Trouble with 401(k) Plans

The criticism of the 401(k) industry is getting louder and harder to ignore, and even Congress is paying attention. Rep. George Miller has stepped forward with a number of reforms that many investors and experts on the industry would love to see implemented.

There are two primary issues at play when it comes to why 401(k)s are broken:

  • The fee disclosure is extremely poor. In a report for 60 Minutes this April, Rep. Miller held up a prospectus and challenged anyone to find the dozen or more fees that investors are socked with each year. Some of them are easily located; others are kept a mystery. And forget reading the prospectus – it’s a rare one that’s written in plain English. Hidden and buried fees have taken about $2 trillion from investors in the last year.
  • There’s a lack of good education out there for investors. Many people, when they get jobs and choose their 401(k) options, are deluged with choices. And those choices are mediocre at best, the 60 Minutes report said. Often investors with little or no expertise are being asked to make difficult choices about the very investments that could determine their futures.

There’s also a lack of awareness on the  part of employers. A recent survey covered  in US News & World Report found that about 73% of employers think that their employees know how much they’re paying in fees. Only 29% of employees are actually aware of what they’re paying. That’s a huge disconnect.

Blaine F. Aikin for Investment News recently wrote that an investment fiduciary’s duty of loyalty demands that the investor’s best interests guide the decision-making process. Mutual funds make up the majority of 401(k) plan options – is that really what’s happening here?

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