By Bob Morgan, Jr.

Following the recent precipitous decline in the equities markets, which has created an estimated $2 trillion in paper losses for 401(k) plans and individual retirement accounts, a number of commentators have proposed abolishing Section 401(k) plans and similar arrangements, or at least cutting back their role.

For example, one economics professor has proposed replacing 401(k) plans with a government sponsored account under which employee contributions would receive a guaranteed annual return of 3%. A key Congressman, George Miller, has called for a drastic revamping of the system. Critics of the current plans point to a number of issues, including lack of employee investment acumen, inadequate contribution rates and ease of employee access to fund prior to retirement.

Nevertheless, before more draconian measures are considered, there are a number of steps that should be considered to shore up the present 401(k) and individual account defined contribution plan system and make it more able to meet the retirement needs of participants.

One important concern with individual account plans is that participants, who often have little financial expertise, have complete responsibility for managing their accounts. One possible fix is to require that employers be responsible for investing the portion of plans attributable to employer contributions, thereby making it very likely that professional asset managers are involved. The employer could receive a tax credit for the cost, or at least an "above the line" deduction.

Further initiatives should be considered in encouraging employee contributions.. For example, the "saver's credit", which provides a nonrefundable tax credit for employee contributions to the plan, but only for relatively low income earners (married couples with 2009 incomes of $55,500 ($27,750 for singles) could be extended higher up the income ladder, to say $75,000 and $150,000. At the other end of the income spectrum, the credit could become refundable.

Employer contributions to the plan need to be encouraged. Employers could be provided with a tax credit rather than a deduction for at least a portion of their contributions. Also, to give senior managers greater stakes in plans, the limit on income that may be taken into account under the plan could be increased from its 2009 level of $245,000 to $500,000 (subject to indexing for inflation) on the condition that the employer make an annual contribution of at least 5% of compensation.

The issue of "leakage" from the retirement system into nonretirement income can also can be addressed. It could be provided that no distributions can be made to employees who terminate employment before age 55 or other designated retirement age, even if the distribution is made to an IRA. An employee's account balance could only be rolled over to the 401(k) of a new employer and, if there is no such employer or plan, the account balance must remain in the plan until the former employee reaches retirement age.

Also, plan loans should only be made for designated purposes such as medical emergencies or home purchases and, if an employee has an outstanding loan at termination, he or she should be not be required to take the unpaid amount of the loan into income as a deemed withdrawal from the plan. Rather, the employee should be allowed to repay the loan to the plan under the original loan schedule.

For all of its shortcomings, the private defined contribution system offers a convenient way for employees to amass a nest egg and keeps some of the pressure off the Social Security system. At least for the present, the right answer seems to be mending, rather than ending, 401(k) and similar plans.