It is defective, but fixable. Unscrew and open the drill case. Adjust the switch to all three settings to see if they work properly when button is pressed. Then place the plastic orange tab back on top of the switch, then the drill case. Holding tightly together before screwing back together, test the orange tab/switch. It should move to all three settings if done correctly. Then screw tightly. Hopefully it stays in the right place when kids are being rough with it!
ours essentially doesn't screw either (we've gotten a replacement and it has the same problem) we figured out if you jiggle the direction switch quite a bit it eventually clicks forward again and will go into forward mode.
It takes a bit of patience to get the drill working in both directions - especially for a 4 year old - there is a switch on the handle that needs to be moved from one position to another to get the drill to screw and unscrew. We experienced the same thing - then figured it out.