Employers who offer pension plans -- whose number is dwindling -- make a host of assumptions in determining whether they will be able to pay obligations as they come due. One of the key assumptions is the rate of return assets invested in the pension fund will earn. All other assumptions being equal, the greater the anticipated return, the greater the anticipation that the money will be there when retirees come calling.

Generous return assumptions came under fire recently from Berkshire Hathaway Chairman Warren E. Buffett. In his annual letter to shareholders, Mr. Buffett observed that the average Standard & Poor's 500 member sponsoring a pension plan assumes annual returns of 8 percent.

Considering that their average plan allocates 28 percent to bonds and cash, which typically do not earn more than 5 percent, Mr. Buffett calculated the remaining 72 percent invested stock and other asset categories would have to earn 9.2 percent to meet the 8 percent goal.

While many say that's doable, Mr. Buffett believes that it's harder than it looks. He points out that the Dow Jones industrials compounded at an annual rate of 5.3 percent during the 20th century. Tacking on another 2 percent for dividends would have left pension fund managers well shy of the 9.2 percent target.

The legendary investor's skepticism is reflected in the assumed rate of return for Berkshire Hathaway-sponsored pension funds: 6.9 percent. Compare that with the 8.75 percent return the City of Pittsburgh expects its woefully underfunded pension funds to earn and you can see what kind of games pension fund sponsors play.

Workers who aren't covered by a pension plan are being asked to make the same assumption about how much the money invested in their 401(k) will earn. Most of them have nowhere near the acumen of pension fund managers. Some of them love games just as much.

Run this example on a calculator available from CCH Inc. at www.finance.cch.com: A 29-year-old who starts with a 401(k) balance of $1,000, invests 10 percent of his $40,000 paycheck, gets no employer match and never gets a salary increase over his career. An investor who earns the same 6.9 percent Mr. Buffett assumes will end up with $614,949 at age 65. If the same 401(k) participant assumes he can match the 8.75 percent return the city of Pittsburgh anticipates, he can assume she will have $952,936 -- 55 percent more -- on hand at age 65.

Setting aside the conservative assumption about never getting a pay raise, the optimistic assumption about returns generates a false sense of security that 401(k) investors cannot afford. So what is a reasonable assumption for those who have a long-term horizon?

The Employee Benefit Research Institute says the average 401(k) account balance grew at an annual rate of 8.7 percent between 1999 and 2006. But that reflects contributions, withdrawals and loans as well as investment returns.

Robert Nusbaum of Middle America Planning in Mt. Lebanon advises investors to expect a 7 percent growth rate on 401(k) accounts. He says that can be accomplished with a blended portfolio of stocks and bonds with risk levels tolerable to most investors.

Bob Malcolm of The Advisor Group believes that long-term annualized returns of 8 percent are available. But risk-averse investors never give themselves a chance to achieve that. The Ross financial services firm recently began administering a 401(k) plan offered by one client in which participants had nearly half of their money in a fund offering a fixed, guaranteed return of just 4 percent.

Retirement savers who choose nothing but fixed income investments "virtually assure themselves they won't have enough money," Mr. Nusbaum said.

"They think they're in a riskless investment, but they couldn't be in a riskier one," he said.

Even if 401(k) investors select a diversified portfolio of stock and bond funds capable of generating 7 percent or 8 percent returns for a year or two, they won't sustain that performance unless they rebalance their portfolio periodically. That means selling funds that have done well and investing the proceeds in the types of funds that haven't done well. In other words, buy low and sell high. The logic escapes visceral investors who, in tough markets, unload investments after their price has dropped and replace them with ones that have run up in price.

That's why many 401(k) investors fail to achieve the long-term returns the funds they invest in produce. Investors in the most wildly successful funds won't achieve the same performance if they sell on downdrafts and buy at inflated prices after a recovery reassures them. Paul Brahim of BPU Investments, Downtown, calls it the difference between "investment performance" and "investor performance."

"Those who sell investment products have a tendency to overstate investment performance and those who buy them tend to underexperience," he said.

Given what Wall Street has done in recent months, it's more likely that 401(k) investors will make overly pessimistic assumptions about returns than unrealistically optimistic ones. Moreover, trying times like these can prompt investors to make ill-conceived decisions based on short-term thinking.

Good pension fund managers don't behave that way because they manage for the long-term. So should you.