Lohmann International Associates
ローマンインターナショナルアソシエイツ
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カナダの年金アクチュアリー、USエンロールドアクチュアリー、社会保障制度による各 の給付コンサルタント。
Tokyo, JAPAN
Leslie John Lohmann, FSA, FCIA, CCP
Canadian Pension Actuaries, United States Enrolled Actuaries and Employee Benefit Consultants Serving the International Community
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Last Updated January 20, 2006 (note that references are updated independently.)

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The Garden Path - 1

Defined Contribution Plans in Japan ("Japan 401K")



Recently, an ACCJ (American Chamber of Commerce in Japan) event discussed the ABC's of DC in Japan. Basically, the event was an effort by an American provider of administrative services to persuade managers of foreign capitalized firms and other firms that are members of the ACCJ that Defined Contribution Plans are the best way to protect the corporate bottom line and secure employee interests in their retirement savings. Nearly one third of the time allotted was spent identifying the decision points in selecting a Japan defined contribution plan administrator.



One of the decision points was "expertise," interestingly, "independence" (one of our consulting strengths) was not among them. Of course, at this time, no one in Japan has expertise with Japan defined contribution plans, including the Japanese, since defined contribution plans were only recently approved and now coming online.



But, the presenter argued, his company's experience in the U.S., which is considerable, made them a better choice here in Japan than the Japanese firms that have never administered a defined contribution plan of any kind.



Well, we think Japan is different from the U.S. and, despite efforts in certain quarters to imitate the culturally bound U.S. pension law, adopting the preconceived, cultural notions that Americans bring with them to Japan can only hurt you, if, you jump in with both feet as they ask you to. The hasty decision is only fast.



ERRORS IN THE PRESENTATION



The presenter listed the following as advantages of DC:



While this is, on the face, true, it belies the fact that, to provide the same benefits over the expected life of a retirement plan, DC plans are always more expensive than externally funded DB (Defined Benefit) plans. Since DB can be funded on the balance sheet in Japan, the difference is even greater.



It is always easier to pay too much or charge too little. Since you are paying too much for the benefits you hope to provide to your employees when you provide a defined contribution (DC) plan, of course there is less risk. But, this leads to the American complaint that Japanese savers refuse to accept higher risk in their investments, thereby missing the higher return. Answer this question: "How would you invest if your company asked you to accept an investment risk they thought was too severe?"



This is a killer - the explanation has nothing to do with the assertion.



First, all retirement plans are flexible to a degree. In Japan, retirement allowance plans funded on the balance sheet are absolutely the most flexible retirement vehicle since the employer has total control (subject to union agreement and employee notice provisions).



Second, employee performance is rewarded by pay. This is exactly what Japan has been trying to move toward for more than ten years - merit-based pay. Any employee payment which is not linked to current pay is not based on current performance. DC plans are based on career pay - your star performers suffer for the benefit of the laggards. Japanese retirement allowance plans are generally based on current pay. Most Japanese TQPP (Tax Qualified Pension Plans) are also based on current pay.



There are only two choices (DB or DC) for providing deferred compensation. The assertion assumes the existing plan is DB. Since some plan is required to remain competitive in attracting and retaining employees, this is a meaningless tautology. Since most retirement plan decisions in Japan tend to be "one way" (i.e., you can't change your mind!), a hasty decision may prove to be effectively a poor one.



We'll address the employee side next time.


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