Lohmann International Associates
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 February 7, 2006 (note that references are updated independently.)

Copyright © 2006 Lohmann International Associates All Rights Reserved

The Garden Path - 2

Defined Contribution Plans in Japan ("Japan 401K") - Portability?

Last time we began a criticism of an ACCJ event that 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.

Our major point was and remains that Japan is different from the U.S. We feel adopting the preconceived cultural notions that Americans bring with them to Japan will hurt you. We recommended doing your homework and avoiding hasty decisions. Most importantly to the developing climate in Japan are the notions American carry about DB (Defined Benefit) plans; they believe that all DB plans reflect the difficulties and limitations of those found in North America - especially the U.S. They also believe that taxes and spending habits of Japanese are reasonably similar to those of Americans. We disagree.


The presenter listed the following as an advantage of DC:

There is an unfortunate movement of opinion that a retirement benefit is portable only if the person who owns the money can-not touch it until old-age retirement. In this case, proponents of DC plans feel that it is an advantage that employees cannot get their money under any circumstances until age 60. Other proponents don't like this provision, but believe that a company should shift to DC based on the assumption that the government will lift these restrictions soon.

Ignoring the moral problem of whose money it is, this definition of portability is defective.

Portability refers to the ability of a mid-career hire to replace the after-tax benefit lost from the prior employment with the benefit available at the change of employment. Japanese private (not EPF) retirement plans, for the most part, do this. The fact is, a mid-career retirement in Japan gets an enormous amount of tax-preferred money at retirement. For out of university hires, the employee is looking at numbers of years of pay from the retirement plan - not numbers of weeks like in the U.S.

As far as the attractiveness goes, which job would you take? The first offers a traditional Japanese retirement allowance plan providing 1.0 month of base pay per year of service. The second offers a 8% of base Japan 401K (capped at \・36,000 per month, which we will ignore). Base pay is \・350,000. You are 35. You figure you will work for 15 years, then change to a new job for a 25% increase. Because you expect to retire voluntarily, you realize that you will not be fully vested in the traditional plan - but discover that you only have to give up 30%. You expect that you will see your compensation increase by 4% on average for the 15 years giving you \・630,327 base pay when you leave.

The traditional plan will pay \・630,327*.7*15*1=\・6,618,434 when you voluntarily leave. You will pay a tax less than \・50,000 leaving you with an after tax payment of \・6,587,512. This is significantly more than one year's after tax income (compare this to what happens in the U.S., by-the-way). Incidentally, you know you are going to quit, but, if you should be involuntarily retired in that same year, you will get \・9,454,905 with a tax of less than \・200,000 (after tax payment of \・9,282,160).

The other company's 401K will accumulate to \・7,721,322. You get this regardless of your reasons for quitting! And there is no tax, yet.

But..., there's a "small" catch. You may not touch your account until you are 60. It will be paid with your other accumulated amounts at that time. You say "small price to pay" for a much larger benefit.

But..., is it even larger? Remember the rule of portability; it is the after tax result at retirement that counts.

As is common in Japan, you plan to use your retirement allowance to reduce your mortgage debt, effectively getting 3.5% after tax return on the money (mortgage interest is generally not deductible in Japan). Assuming you will retire at 60, the retirement allowance effectively will accumulate to \・9,292,336 after tax.

On the other job, the 401K money will accumulate before tax to \・9,412,248 at your age 60. You will receive this money and the newly accumulated benefits (another 401k plan; \・9,978,729) from your new employer at the same time, for a total of \・19,390,977 (by the way, reflecting the magic of final average DB plans, you would have gotten \・23,325,975 from the traditional plan with no 25% increase during your career if you had stayed with the first employer until age 60). The tax will be \・459,098 for a net after-tax benefit of \・18,931,879. The tax on only the \・11,226,062 benefit from your second employer would have been \・298,936 with no other payment at the same time, meaning that you paid a tax of \・160,162 on the benefit from the first employer.

Your net after tax benefit from the first employer, then, will be \・9,252,086. The traditional plan, which cost your employer less money, provided \・40,250 more after-tax benefit - at no risk to you - no investment risk and no risk of subsequent tax increases.

Incidentally, if your second employer does not have a DC plan, the tax on your \・9,412,248 at age 60 will be \・170,612, leaving a net benefit of \・9,241,636.

Clearly, your best deal is to go with the company that provides the traditional plan.

Obviously, one of the tricks we used here, was paying off non-deductible mortgage debt. Americans don't have this opportunity, although they do share the basic arbitrage opportunity that arises when paying off interest rather than earning it. Of course, a 15 year service American would never see a defined benefit lump sum exceeding one year's pay...especially after-tax (income and excise).

We have cross-referenced a related worksheet in the internet version of this article so you can see numbers for all durations.

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