(Illustration by Dadu Shin for The Washington Post)

When lawmakers added a subsection to the tax code called the 401(k) more than three decades ago, they could not have imagined that this string of three numbers and a letter would become a fixture in the financial lexicon.

Nor could they imagine the stress it would unleash.

A poll by Gallup last year showed that for two-thirds of Americans, not having enough money for retirement topped seven other financial worries, including medical bills, mortgage payments and their children’s college tuitions.

Worrying about having enough money for retirement is not a new phenomenon. But the rise of the 401(k), dating to the early 1980s, has steadily shifted more financial responsibility onto the shoulders of many Americans who are — let’s face it — clueless.

The number of people who are unprepared is growing. In 1983, researchers now at the Center for Retirement Research at Boston College calculated that 31 percent of working-age households were “at risk” of not being able to maintain their standard of living after they retired. By 2009, it was 51 percent.

“I don’t know how you feel, but managing your own money is just horrible,” said Alicia Munnell, director of the center. “We just don’t know how to do it.”

Consider the hurdles between every American with a 401(k) and a decent retirement: First, wade through your HR department’s paperwork to enroll in a plan at your company. Second, save enough. (Imagine what you think is enough. Then save more.) Next, manage your investments intelligently through stock market highs and lows, tending to your portfolio every year to make sure you have the right balance of stocks and bonds, and avoid withdrawing any money early. And not least, when you retire, ration your money at just the right rate: not so little that you live uncomfortably but not so much that you run out.

The result has been a system that works well for people who know how to use it. For many others, it’s better than nothing, but it still may not be enough.

“Does the system work or not? It’s really a ‘compared to what’ question,” said Eric Toder of the Urban Institute. “One side emphasizes the glass is half-full and the other emphasizes the glass is half-empty. The real question is, how do we make the system work better for the people for whom it’s not working while not destroying the benefits?”

As company pension plans peter out, Munnell estimates that it will be another decade before people rely almost entirely on their 401(k)s.

That means 10 more years before a system — once imagined to be only supplementary to Social Security and pension plans — is fully tested. That’s 10 years in which bigger waves of workers sign up for a savings vehicle that they expect will see them through old age.

For the past several years, there’s been a movement to fix the 401(k), or at least make it work better for average people — that is to say, almost all of us — who are bound to make some mistakes along the way.

Reformers want the 401(k) of the future to look very different. But even the program’s biggest critics concede that the system that was unwittingly launched in 1978 is here to stay.

Retirement plans, defined

Broadly speaking, companies help workers plan for retirement in two ways.

Defined benefits, often called pension plans, guarantee workers a certain amount annually when they retire based on earnings in their final years and how long they’ve worked at the company. The employer must set aside the money, invest the funds and pay employees, regardless of what happens in the market.

In a defined-contribution plan, which includes 401(k)s, the employer diverts money from the employee’s paycheck — while perhaps chipping in some to an account owned by the employee, effectively creating a savings account. There are restrictions on when the money can be drawn. The employee owns the account, though, and can move the money from employer to employer.

The 401(k) was created by the Revenue Act of 1978, which also reduced individual income tax rates and the corporate tax rate and created flexible spending accounts.

But years before the law, companies had defined-contribution plans that were precursors to the 401(k). Firms — banks in particular — created accounts in which employees could put their bonuses rather than collect the money in cash. The accounts allowed employees to defer the taxes they would owe immediately with a cash payout.

The IRS was wary of this setup, but Congress gave it the rubber stamp. In the 1978 law, Congress added 401(k)s to the tax code, formally allowing employees to put a portion of their salary in these tax-deferred accounts. Three years later, the government issued official regulations, and companies including Johnson & Johnson and PepsiCo were among the first to adopt the new 401(k).

The number of companies offering the plan exploded in the 1980s and 1990s.

In 1990, about $384 billion worth of assets had been saved in 401(k) plans. By 1996, the number surpassed $1 trillion. The mutual fund industry flourished with all the new business.

In the meantime, companies rolled back their pension plans.

‘If you want to drive a car . . .’

Let’s say a worker making $50,000 contributes 6 percent of her annual salary with a 3 percent employer match. By the time that person retires, she should have about $320,000 saved up, according to calculations by Munnell. But reality rarely plays out that way. People forget to enroll, or they don’t save enough, or they wind up withdrawing money to cover a financial emergency. The result: Individuals nearing retirement have closer to $78,000 saved, according to the Federal Reserve’s Survey of Consumer Finances. (And that number is rosy; the last regular survey was done in 2007, just before the financial crisis.)

“The old-style 401(k) before automatic enrollment came along was basically telling people, ‘If you want to drive a car, you have to be able to repair it and maintain it yourself,’ ” said William Gale, director of the Retirement Security Project at the Brookings Institution. “If the 401(k) is supposed to be the primary retirement vehicle for the average American worker, then it needs to be consistent with the information and financial ability of the average American worker, who is just not prepared to manage funds like that over the course of a lifetime.”

Whatever the 401(k)’s flaws, freedom has been a selling point as people work at multiple companies in their careers and need to move their retirement savings with them.

“I think there’s a reason people do tend to like these things,” said Peter Brady, senior economist at the Investment Company Institute, a mutual fund industry group. “They much better match up to people’s work histories . . . and I think they like having control over their investments.”

Some of the fixes proposed involve diminishing the do-it-yourself nature of the 401(k), or at least nudging people toward better decisions.

The Pension Protection Act of 2006 paved the way for companies to offer automatic enrollment in 401(k) programs. Many firms have also added automatic annual increases in how much employees contribute. Half of the companies surveyed by the Profit Sharing/401(k) Council of America in 2010 offered automatic enrollment. Of those, about 40 percent also offered automatic increases.

Many companies automatically enroll their workers to contribute roughly 3 percent — more than they might save if they didn’t enroll at all but probably not enough to build a secure nest egg.

This year, the Treasury Department offered new rules that would make it easier for employers to offer annuity options to workers who are retiring. This way people are not left having to manage a lump sum but can instead count on a steady stream of payments.

In a way, these changes try to bring the best features of pension plans — their steadiness and predictability — to the 401(k).

“It’s kind of like we ran all the way to the cliff to D.C. [defined contribution] and then looked over the cliff and decided to make them more like D.B. [defined benefits],” Gale said.

Gale predicts that in the future there will be “hybrid” systems in which employers are still leaving much of the retirement saving to workers but plans are less overwhelming to manage.

At the core of any reform, Munnell said, there has to be massive education of employees on how to plan for retirement. Many people think that saving 6 percent with a 3 percent match, for example, is enough. Not so, according to the Center for Retirement Research.

As a baseline, the group estimates that a household earning at least $50,000 needs roughly 80 percent of its earnings to maintain its pre-retirement lifestyle.

To pull that off, a person who is 25 and earns $43,000 needs to be saving 15 percent a year in order to retire at 65, assuming a 4 percent rate of return on his investments. Wait until 35 to start saving, and the necessary savings rate creeps up to 24 percent.

The solution for many people, Munnell said, will be to work longer. If that 25-year-old doesn’t retire until 70, he would only have to save 7 percent a year.

“Our whole retirement system’s too small,” Munnell said. “When you put together Social Security and these 401(k) plans, it’s just not going to provide enough for retirement income. . . . The question is, can you fix it by fixing the 401(k)s?”