NOW UNIVERSALIZE AND FUND THEM:

The 401(k) has come a long way in the last 40 years. As it evolved, policy makers have introduced improvements that are becoming standard practices. Automatically enrolling employees dramatically increase participation. Selecting low-fee index funds as the default investment option lowered costs to consumers and improved diversification. These have made 401(k)s more popular and more successful.

But problems remain. Only about 61% of  Americans employees have access to a retirement benefit at work. Smaller  employers are less likely to offer them because of high administrative costs and many part-time employees are not offered them at all. While  it's not clear that 100% of the population should be saving for retirement--for example, a worker earning low wages who will see a large income relative to their salary from Social Security may not need retirement savings--participation in 401(k)s should be higher. A new bill introduced in Congress this year that would make it cheaper for small employers to offer retirement accounts could increase coverage.

The other unresolved question is how retirees should spend the money in 401(k)s after they retire. We've figured out saving, participation, and the wisdom of using index funds, but knowing how much to spend each year and managing money after retirement is a harder problem with little margin for error. Annuities, where insurance company pays a steady income for life, are popular with economists, but no one else. It remains a problem for regulators and the retirement industry.

Retiring Baby Boomers are the first generation to retire on a 401(k), with the first reaching age 65 in 2011. Their financial security will be the first big test of the plans' success. Other countries have been successful combining 401(k)-like accounts with government pensions, ensuring most of their citizens receive 70% of their working income in retirement. With a few tweaks, those systems could work in America too.

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