401(k) plans look good on paper. If someone contributes their whole life in a modest earning portfolio, weathering the ups and downs of markets, the average earner should amass about $400,000. At the end of 2007, the lucky workers with a 401(k) aged 55 to 65 had a median retirement account value of $100,000, but it fell by 25% to something near $70,000 by the end of 2008.

What happened?

Real life.

Employers need not provide 401(k) plans — half of the work force has no 401(k) plan or any other pension plan. When employers actually do sponsor 401(k) plans, their contributions are voluntary: since November 2008, name-brand employers — Motorola, FedEx — have led the way for employers to drop their matching contributions. Even when employers and employees contribute, the amount is usually 3 to 5 percent of pay. Experts recommend 10 to 15 percent.

Even if people have accumulated 401(k) funds, they withdraw them before retirement, especially if they are laid off, change jobs, divorce, buy a house.

The Obama administration has been floating the idea that workers without a pension plan would be automatically enrolled in an IRA. IRA’s are high-fee financial products with poor returns. The one main reason people who need tax deductions find them attractive is that the taxpayers give them money to have one. Same with 401(k)s.

They are terrible products without the taxpayer subsidy. IRA’s and 401(k) plans are managed by the individual through for-profit financial service providers who have conflicted relationships with employers and few reasons to disclose fees. Moreover the individual account structure disadvantages the worker by preventing the commingling of funds, the spreading of risk and the bargaining for lower fees.

These factors lead to 401(k) investment net-of-fee returns to be worse than for traditional plans. And, if you earn $200,000, are in the 38-percent tax bracket, and put in $1,000 you get $300 from the government. If you earn $20,000 and put $1,000 in you get nothing from the government.

If tax payers gave me money for eating canned beets I might find them more attractive too.

There are the haves and the have nots. The haves do not have to resort to IRA’s. University professors and researchers in TIAA-CREF have low-cost and well-managed 401(k) type products; they even have a guaranteed option, an option that means the workers are protected from the ups and downs in the stock market.

Government sector workers have low-cost well-managed traditional pensions as do employees for some large companies like Exxon or GM.

The have-nots have IRAs and 401(k)s.

(Brainstorm illustration incorporating photos by Flickr users blackpitshooting and boorman818)