05/03/2012 09:09 am ET Updated Jul 03, 2012

Is 401(k) a Ticking Time Bomb?

"Running on Empty. Running into the sun but I'm running behind.

-Jackson Browne

Internal Revenue Code section 401(k) is the only section of the US tax code that the average person can cite.

They know it has something to do with whether or not they can retire with dignity. Or retire at all.

The adoption of section 401(k) in 1982 turned out to be one of those big moments that changed everything.

401(k) plan investments are a primary driver of the investment markets. It is the employee retirement benefit that most companies offer. The performance of the plan's investments are also the reason that many people are pacing the floors at night, worrying if their retirement will get delayed or destroyed.

Until 401(k) came along, pension plans were usually defined benefit plans.

A defined benefit pension gives you a set number of dollars for set period of time. It usually pays out over the course of your lifetime after you retire. (Like an immediate annuity does.)

With a defined benefit plan, the employer takes responsibility for making sure pension money is safe and properly invested.

With the advent of the 401(k), employees with little or no investment experience were required to pick among investment options offered by an employer.

Employees were put in the position to fail. Many have.

It is up to the employer to pick what investment company handles the employee's money. If the employer picks a dog, with few options, the employee is out of luck.

Even worse, some companies push their employees to use 401(k) money to buy stock in the company they work for. If the company goes broke, people lose their jobs and their retirement savings, too.

There is a second major problem: Not putting enough money in the 401(k) to begin with.

401(k) plans give people a lot of freedom but my experience in working with injury victims and lottery winners who get big money is that too much freedom is not a blessing.

Freedom without perceived consequences can lead to disastrous decisions.

I've always encouraged people to put the maximum amount into a 401(k) plan. Few do.
Many put in little or nothing at all.

Now many are looking at a bleak retirement.

Defined benefit plans encouraged people to stay at the same employer. 401(k) plans do not.

I've watched tons of people change jobs and then blow the 401(k) money before they start their new job.

It's been said that 90% of people with a lump sum of money will run through it in five years or less. The same statistic can hold true for people who receive 401(k) rollovers as it does for lottery winners.

When historians study the cause of the 2008 economic meltdown, they will see that the change from defined benefit plans to 401(k) plans in 1982 was a factor. It was one of many shifts where dramatic changes were made in people's lives and liberties. People didn't realize just how dramatic until years later.

If we are going to keep from running behind, 401(k) is one of those things that we need to fix.