From saving to spending: What’s next for 401(k)s

It's been hard enough teaching people how to save for their retirement. It could be even more difficult to teach them how to spend that nest egg.

As the multi-trillion dollar 401(k) industry becomes the predominant way that many Americans finance their golden years, millions of retirees are going to have to make big, complex decisions about what to do with that wad of cash they've accumulated. That's particularly difficult since most people don't know how long they're going to live, or what kind of health expenses they might encounter later in life.

"(When) we look at sort of the big open questions about how well 401(k) plans are going to do, first there's a question of, 'Can we get people to save enough?'" said Richard Johnson, director of the program on retirement policy at the Urban Institute think tank. "Then the other big question that is just now starting to get more attention is, 'How are people going to withdraw their funds?'"

The prospect of managing a pile of accumulated cash requires a lot more savvy than just receiving a monthly pension payment or Social Security check, and experts say it's not clear how many people will have those skills.

When David Blanchett, head of retirement research for Morningstar Investment Management, hears the informal estimate that 10,000 people are expected to retire every day over the next 20 years, he can't help but think of how ill-prepared many of those people are to handle their retirement savings.

"I hate the thought of 10,000 new portfolio managers every day," he said.

Blanchett said many of those people won't have enough money to afford a financial advisor who could help come up with individualized plans to stretch their retirement dollars. Instead, he expects that the financial services industry will see another opportunity to grow their business by coming up with managed products that offer people a more generalized plan for drawing down their retirement funds.

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Retirees will have to take some initiative to figure out whether these plans are worthwhile and cost-effective, though. And Blanchett expects that retirees will have to spend some time fending off bad apples who try to persuade them to make risky choices with those big bank balances.

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Con artists

"If I had to pick a growing industry in this country, it's going to be con artists that target the elderly," he said.

Another concern is that people will be paralyzed by fear. When Alicia Munnell, director of the Center for Retirement Research at Boston College, started studying 401(k)s, her concern was that retirees would spend their nest egg too quickly, burning through it by splurging on something like a cruise around the world.

Now, she thinks people may go the other way, holding on to their money too tightly because they don't want to outlive their savings or be unable to pay for pricey, end-of-life health care.

"I think people are going to be scared," she said.

Johnson said that so far, researchers are finding that people are perhaps too skittish about running out of money, and aren't spending enough of their nest egg.

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"They really don't spend down much, and what that means is they're not living as well in retirement as they should," Johnson said.

They may have good reason to be worried about running out of money. Experts say that in the short term, the biggest worry is that people are going to retire without enough money to manage.

"We're going to have a retirement crisis when we have the first cohorts that are really totally dependent on 401(k)s," Munnell said. "The balances are just not going to be enough."

Munnell's analysis of government data from 2010 found that the median 401(k) and IRA account balance for households ages 55 to 64 years old was $120,000. That sounds like a lot, until you consider how long you hope to live—and what kind of lifestyle you'd like to have.

Munnell is hopeful that the next cohort of retirees will be in better shape, because those with access to 401(k) plans will have a better understanding of how much they need to save and how early they need to start saving. They also might be working longer.

Experts say there will continue to be some people who are left out of the retirement system altogether, because they don't work for employers that offer a retirement plan or they just don't opt into them.

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Retirement experts expect the 401(k) industry to be around for decades to come, although some predict that the industry will change substantially as more people become reliant on it. That's because few employers will want to go back to the old pension system—which didn't work well for all retirees, either—and, for now at least, there aren't many other options.

"Anyone who says (401(k) plans) aren't working—well, what's the better solution?" Blanchett asked.

—By CNBC's Allison Linn