I've spend the past couple of days reading every F150 4x4 problem post I could find. It's been a big help, but I'm still having some issues. I recently bought this 2004 F150 5.4 and the 4WD systems appears to need some care in multiple areas.
Problem #1 (Fixed): Transfer case engaging, but not disengaging 4 Hi / 4 Lo
A few days ago, I turned the switch to 4 Hi. It went into 4 Hi and light went on, but wouldn't come out when I switched back to 2 Hi. It turns out there is one relay to engage and another to dis-engage the external transfer case motor. (one relay does counter clockwise, the other does clockwise). I replaced both relays located under the hood and now the transfer case shifts in and out of great as it should. Fixed. I also replaced the transfer case motor, but that seems unnecessary in hindsight.
Problem #2: Wheel hubs (IWE) not locking.
When I am in 4Hi, it appears the front hubs aren't locking. I've read everything I could about the IWE system and replaced the solenoid on the firewall.
I pulled the vacuum lines at each wheel hub. I have strong vacuum on the passenger side when in 2 Hi and it goes away when I switch to 4Hi (as it should). The vacuum on the drivers side feels very weak. There must be a leak somewhere? Any place to focus on?
Vacuum keeps the hubs dis-engaged. So if I can turn off the vacuum by switching to 4 hi, why aren't the hubs engaging? Can the IWE actuators get stuck in the dis-engaged position? I've never heard any of the grinding or other noises people sometimes get on these front hubs, but who knows about the previous owner.
...and to answer your question, yes the IWEs can fail internally. My right side IWE was actually broken/jammed. When I removed it there was a lot of dried burnt looking residue (used to be grease) inside it.