Account down: if you think you're going to retire on your 401(k), think again.

• Author: Johnston, David Cay

MORE THAN 42 MILLION Americans, one in three with a job, have a 401(k) plan to defer part of what they make today for their old age. Survey after survey shows that Americans love their 401(k) plans and, except for the oldest workers, value them more highly than traditional defined-benefit pensions, which pay a lifetime annuity, are largely guaranteed by the federal government, and have been in decline since the 401(k) began two decades ago.

It's easy to understand why. Traditional pensions pay off big-time only if you stay with one company for a career, something fewer and fewer people do. If you switch jobs your benefits are frozen in the dollars of the year you quit, their value eroded by inflation. By contrast, 401(k)s come with a regular statement showing how much you have, and they are portable--when you switch jobs, you can roll your money over into an Individual Retirement Account.

So few Americans have ever had financial assets that getting a monthly statement showing shares of mutual funds can make one feel prosperous. As a leader of the Machinists union told me in May about his members--who all made less than $20 an hour--having a 401(k) plan makes working men think they are capitalists--until their jobs disappear and they have to cash in their mutual funds, paying a 10-percent tax penalty, just to feed the kids and keep a roof over their heads.

Anyone who watched their 401(k) mutual funds plummet 25 percent in the last two years may be wondering if the benefits of these instruments as retirement vehicles haven't been greatly oversold. And they are right to do so. The success of 401(k) plans is a triumph of marketing over sound policy, for despite their portability they are inadequate to the task set for them: to provide reliable income in retirement.

High fees make them inefficient. Contributors are at risk from kleptomaniac bosses. And overall, they are so heavily invested in employer stock--as in Enron and Global Crossing--as to make them a gross violation of the three basics of investing: diversify, diversify, and diversify.

In their generally excellent book, The Great 401(k) Hoax, William Wolman and Anne Colamosca show us how most of us are not so smart as we imagine when it comes to understanding value for our money. This timely book shows the real costs, and risks, of mass innumeracy. And the portrait it paints of the investment skills of most Americans raises serious doubts about the Bush administration's proposal to allow workers to invest two percentage points of their Social Security taxes on Wall Street.

Wolman, recently retired after a long career as the economics...