Therefore, many companies are quickly brushing up on 401(k)-plan governance. Two-thirds of midsize-to-large employers say they now intend to benchmark 401(k) administration and procedures to best practices, Hewitt says, up from 56 percent last year. (For a list of key governance tips, see the next section.)

Even as they address governance, many plan sponsors will need to keep an eye on a raft of proposed changes. Last year just weeks after the September market plunge, the House Education and Labor Committee held hearings to explore possible modifications. There were several varieties of "universal" accounts proposed, which would cover all workers. Under one plan the federal government would make contributions to such accounts and guarantee a baseline rate of return. A different plan is based around an index fund of both stocks and bonds that would shift toward a more conservative mix as a worker neared retirement.

Indeed, the chorus is growing louder by the day as new groups are formed with the intent of either overhauling the 401(k) system or making substantive enough changes that an outright overhaul is forestalled. Retirement USA, a project backed by the Service Employees International Union, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, and the Pension Rights Center, is advocating for "a new visionary system" that would combine elements of a pension plan (such as pooled professional investment and lifetime payout) with portability and simplicity.

"I don't see how 401(k)s can improve enough to be the only retirement vehicle besides Social Security," says Alicia H. Munnell, director of the Boston College Center for Retirement Research. She favors a new tier of retirement saving that is mandatory, that supplements Social Security, and that is protected against market fluctuations — perhaps with a collar from the government guaranteeing a lifetime average rate of return between 4 and 6 percent (assuming the government can bear more risk than the private sector). Such a new tier might transform current 401(k)s into an ancillary benefit for higher-paid employees.

Others, such as former Treasury Department official Mark Iwry, of the Retirement Security Project, say that changing the ways in which participants can take money out of 401(k) plans is just as important as how the money goes in. He and others have proposed a system in which retirees could "test drive" an annuity as a way to become comfortable with an option that only a small percentage takes advantage of today.

Most likely to be adopted sooner rather than later is an "automatic IRA" designed for small companies, which often have no 401(k) plan at all due to the administrative expense. Under this scheme, employees could have IRA deposits automatically deducted from their pay, and companies would receive a small tax credit for setting up such programs.

Another proposal, called SuperSimple, is modeled after a system that will go into effect in the United Kingdom in 2012. It eliminates much of the legal baggage that accompanies corporate-run 401(k)s, such as compliance tests that measure the breadth of participation across a workforce, and adds a government contribution to accounts. It would give employees the chance to opt out, but would feature automatic enrollment and perhaps an automatic escalation of their contribution (as a percentage of pay) over several years.

There are other ideas on the table as well, and it is unclear at this point which ones, aside from those aimed at helping small companies offer some kind of modest defined-contribution plan, will gain real traction in the months ahead. Companies would no doubt love to be disentangled from 401(k) plans, but the prospect of a government-run system faces plenty of political roadblocks and lobbying resistance. "The best thing the government can do for retirement security is to revive the economy and lower the cost of health care," says Walter.

Those steps could help avert a potentially painful side-effect of the current situation: workers who stay on the job longer than they (or their companies) want, due to underfunded retirement accounts. "We're going to see a lot of demoralized people doing the minimum and staying as long as they can," predicts Steven Vernon, president of Rest-of-Life Communications, a retirement-planning advisory firm. Companies, he says, "should have a good performance-management system so you can move them out without getting sued for age discrimination."

Governance Guidance
Companies shouldn't wait to see which, if any, laws will be changed, let alone what demographic bubbles may inflate. But they should shore up defenses now, through improved governance practices, because that can forestall legal actions and ensure that current 401(k) plans are being run as optimally as possible. The keys to good plan governance are:

1. Analyze all plan investments thoroughly. Fiduciary duty compels employers to examine underlying investments and identify the risks, even in funds broadly tailored to risk or age categories. "You don't want to give the impression, even inadvertently, that employees should invest in a fund based on their age or retirement date without considering [all of] their risk preferences," says Walter.

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