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
Please use the copyright notice to send E-mail. Note that all automatic e-mail references now must be hand adjusted as indicated to reduce spam.
View latest LIA$FACTS$
Index to LIA$FACTS$
Last Updated January 20, 2006 (note that references are updated independently.)

Copyright © 2006 Lohmann International Associates All Rights Reserved

The Garden Path - 3

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

Statements and Understanding?

We are continuing a criticism of an ACCJ (American Chamber of Commerce in Japan) 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 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, if, you jump in with both feet as they ask you to. We recommended 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. MORE ERRORS IN THE PRESENTATION

The presenter listed the following as advantages of DC:

DC can be an effective way to accumulate funds for retirement. Unfortunately, it is the retirement plans of your broker and plan administrator that will be accumulating those extra funds; despite legislated limits to administration and other fees, the typical Japan 401K will see at least 2% of assets off the top every year. Sources of these expenses will be the "special corporate tax" imposed by the government (about 1.125%), administration expenses, investment fees and transaction costs (broker fees). The experts in America have failed to achieve a positive return for the past three years. The Japanese, significantly longer.

But, let's shed some light on these "advantages."

Statements. Japanese have generally not needed account statements because determining the amount a member will get from the plan requires only a little bit of arithmetic ability or a \100 calculator. For the typical Japanese private retirement plan, the employee simply looks up the factor applicable to his/her years of employment and multiplies that factor by his/her base pay. There it is. That is the amount of money the employee would get if they retired for company reasons. If the employee is considering retiring for personal reasons, there will be another table or a vesting factor to apply, but, like the first operation, it is simple arithmetic. A company that seeks better appreciation of their defined benefit retirement plan in Japan can provide statements. It's an idea that makes sense.

Of course there is a benefit to Japan 401k plan participant statements; the participant's account will be reduced for the cost of producing the statements and the plan administrator will make more money. Like accumulating funds for retirement, Japan 401k favors everyone except the employee.

And, if a company provides benefit statements for the defined benefit retirement plan, the company pays - employees' future benefits are not reduced in any way.

Understanding. Which is easier to understand, a retirement plan that the promoters of claim every employee needs special education (on company time) to learn how to use - Japan 401k, or a plan where you go to work, do your own job, retire and collect on - Japanese defined benefit?

We think it is simple; the typical Japanese defined benefit retirement plan is simple to understand and efficient in delivering intended benefits at levels that make sense.

Having defeated these two non-advantages so quickly, there is still a lot more space in this issue, so we will explain why Americans believe that DC is easier to understand than DB.

ERISA's rules for defined benefit plans grew out of several uniquely American cultural beliefs - among them; (1) the idea that a retirement plan must provide a pension payable at "normal" old age retirement as the primary benefit, and (2) that any benefit promised in the future has an equitable buildup leading to a specific value today.

The "spendthrift" clause in insurance contracts provided that, when a beneficiary took payment as an annuity, creditors could not attach the annuity; such a pension permitted the beneficiary to buy the necessities of life at a time when creditors could take virtually everything.

Employers saw that employees would retire with debt and took pains to make sure that their former employee could not be forced to take a lump sum in order to satisfy creditors. This combined with the concept of providing an annuity for the rest of the life of the former employee confirmed this cultural predisposition to annuities instead of lump sums at retirement.

Thanks to the insurance scandals at the beginning of the last century, the concept of minimum cash values (equity in a future benefit) grew in importance. By the time ERISA came on the scene in 1974, this concept had spilled over into company-provided retirement plans; Americans believe an employee develops an unreducible equity build up in the future pension before the payment is actually due. This became the "actuarial equivalent" benefit; the actuarial equivalent benefit was the actuarial present value of the deferred pension accrued to date. A further complication was introduced by providing annuities to employees that chose early retirement - the early retirement reduction factor.

While an employee could reasonable easily (except for Social Security offset plans) calculate the deferred annuity, determining the amount of money available was an impossible chore, and, before amendments to ERISA, changed constantly.

But, as we have said many times, Japan is not America. These complications do not yet exist here.

Copyright © 2006 Lohmann International Associates All Rights Reserved
Index to
|Lohmann International Associates

Copyright © MMVI Lohmann International Associates All Rights Reserved