Remember the Bush Administration's push to partially privatize Social Security? The privatization advocates warned that insolvency loomed unless dramatic changes were made to the system. Social Security was also labeled a terrible investment. The Bush team's argument: Let people invest a portion of their payroll tax money with the financial wizards of Wall Street in an account reminiscent of a 401(k). Workers would get a higher rate of return on their Social Security money, and the economy would benefit from a higher rate of savings.

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"We heard the fear that Social Security will go bankrupt and the solution is privatize it," says Zvi Bodie, a finance professor at Boston University. "Yeah, right! It was a self-serving proposal from industry."

Imagine Bear Stearns, Lehman Brothers, American International Group, and other titans of finance managing Social Security? The late economist Robert Eisner told me during an interview in the early 1990s that "Social Security was not meant to be a get-rich scheme or a competitor to go-go funds." He was right.

So many responsibilities
Question is, in light of the current turmoil in the financial markets, should Wall Street manage any of our long-term retirement savings funds? Is the 401(k) plan, which has become the main retirement savings vehicle for the American worker over the past three decades, a mistake? The case for rethinking the 401(k) as a pillar of retirement savings is compelling.

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To be clear, the democratization of stock ownership is a welcome and powerful trend. Two hundred years after 24 New York brokers and merchants met on Wall Street to sign the "Buttonwood Agreement," a pact that established standard commissions for trading securities, investing now has all the characteristics of a mass social movement. People's Capitalism has helped fuel entrepreneurship and risk-taking.

Despite abuses, stocks options, restricted stock, profit sharing plans, and similar equity-based compensation schemes are critical building blocks to innovation, the driving force behind economic growth. Thanks to the Internet and advanced telecommunications networks, it's cheaper than ever for individual investors to buy securities.

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No, the question is focused on retirement savings, the money employees set aside during their working years to smooth out their standard of living in retirement. Employees bear all the responsibility if they make mistakes, and time to make up for investment mishaps shrinks as stomachs go slack and hair turns gray.

It's an axiom of modern finance that the only way to create the possibility of higher returns is to take on greater risk. But the risks employees are absorbing today seem disproportionate to the potential rewards.

For one thing, most employees work for companies that demand more of their time and effort, and that effort is showing up in high productivity numbers. For another, most people not only work but they also raise families, help their children with homework, spend time with friends, volunteer in the local community, vote in elections, and try and maintain their health with exercise and eating properly.

At least, even if they fall short, these are all things they try to do and are encouraged to do. Yet, on top of all that, they're supposed to know how to allocate investment assets for when they retire in 5, 10, 20, or 30 years from now.

Wired for mistakes
Now, look at what is happening in the financial markets today. The stock market is down more than 20 per cent since its fall 2007 peak. Investor confidence in the bedrock money market mutual fund industry has been shaken now that a major mutual fund company has broken the never-break-a-buck pledge.

The mortgage-backed securities market is in shambles. How is the average employee to cope with this? Is it good public policy for workers to be responsible for their asset allocation strategy during the worst financial crisis since the Great Depression?

A steady stream of scholarly research called behavioral economics and behavioral finance makes a persuasive case that many people aren't wired to invest well. The scholars have cataloged a long list of systemic investing mistakes, such as representativeness, a fancy term for an ingrained tendency to rely on stereotypes; overestimating an ability to predict the future; over-conservatism, because people fear a loss more than they relish a gain; a willingness to hold on to bad bets because we don't like to feel regret; a tendency to follow where the herd is going when it comes to the market. The list goes on.

Wall Street doesn't do well by the average worker. The standard advice that individuals fare best when they turn over their money to professional money managers is wrong. It's a bromide guaranteed to lose individuals money, with much scholarly evidence that actively managed mutual funds systematically underperform passively constructed index funds.

Plus, workers are paying a lot in fees for that underperformance. As Warren Buffett put it in Berkshire Hathaway's 2006 annual report, "Meanwhile, Wall Street's Pied Pipers of Performance will have encouraged the futile hopes of the family...will be assured that they all can achieve above-average investment performance - but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon."

Individual investors lose
Wall Street is rife with conflicts of interest, and the average worker is the loser. Who said that? Consumer firebrand Ralph Nader? No, it was David Swensen, the legendary chief investment officer for Yale University's endowment fund. In his book Unconventional Success: A Fundamental Approach to Personal Investment, Swensen wrote that "Individual investors lose. Mutual fund managers win."

Swensen makes a strong case that profit-maximizing mutual fund managers always choose to line their own pockets at customer expense through high fees, opaque charges, excessive trading, and other financial shenanigans. "When a sophisticated provider of financial services stands toe-to-toe with a naive consumer, the all-too-predictable conclusion resembles the results of a fight between a heavyweight champion and a 98-pound weakling," he writes. "The individual investor loses in the first-round knockout."

In 1940, Fred Schwed Jr. famously captured the essence of Swensen's perspective with one of the most memorable Wall Street book titles ever: Where Are the Customers' Yachts? It's worth repeating the allegory that starts off his book:

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor.

He said, "Look, those are the bankers' and brokers' yachts."

"Where are the customer yachts?" asked the naive visitor.

Where indeed? What is good for Wall Street isn't always good for Main Street. Swensen called for government to act "in loco parentis" and create powerful incentives for companies to put their employees into passively managed well-diversified portfolios, perhaps similar to the low cost, broad-based, limited-choice offerings of the Federal Thrift Plan.

But other ideas are worth pursuing. For instance, why not attach to every Social Security number an account consisting of a 60 per cent equity index fund and a 40 per cent Treasury Inflation Protected Securities portfolio? The retirement savings plan would essentially do as well - or as poorly - as the US economy.

Better yet, a number of academic quant jocks are exploring creating annuity-like products that would guarantee workers a steady, inflation-protected income during their golden years but would be less expensive for companies to offer than the traditional defined-benefit pension fund.

The demand then would be on workers to take the responsibility of saving but avoid the burden of investing. These ideas are not only worth exploring - they're an improvement over the status quo.

Right now, the Federal Reserve and US Treasury are trying to shore up a crumbling financial system. Now isn't a time for action on big questions. That will come when the panic subsides and the foundation of the US capital markets is stabilized. Among the issues to explore is whether the great 401(k) experiment has run its course.