They may be latecomers to the defined contribution world,
but the Japanese are making big strides in retirement
Japans most recent effort, which took effect at the
start of the year, will expand eligibility in the
countrys 15-year-old defined contribution system to
include public-sector employees, non-working spouses of plan
participants, and others previously only covered by defined
benefit pensions. Beyond allowing universal participation in
so-called DC plans, Japan has come up with a creative means to
bring employees of small employers into the system: The
government intends to allow small companies those with
fewer than 100 employees to make contributions to
employees individual retirement accounts.
Japan is finding new ways of helping its 65 million workers
save after realizing, back at the turn of the century, that it
had become increasingly difficult for a country with the oldest
population in the world a full third of its citizens are
now over 60 to keep its head in the sand when it came to
the economic future of its growing elderly population. The
Japanese government created a retirement plan system for its
private sector by passing the Defined Contribution Pension Act, which
was enacted in 2001.
In Japan, as in the U.S. and elsewhere, it is costly for
small employers to sponsor DC plans. There are no economies of
scale for financial services firms that sell small plans, and
they pass the costs on to employers. If companies are able to
make direct contributions into their workers IRAs, the
savings rate could rise substantially.
With the help of Japans 2001 legislation, by November
2014 there were 4,520 employer-sponsored DC plans covering
19,124 employers, according to Haruka Urata, a director of
benefits at consulting firm Willis Towers Watsons Tokyo
office. That adds up to around 4.5 million employees, says Tomohiro Kawaguchi, a consultant with
Mercers Tokyo retirement consulting group. Still, after
more than a decade in effect, only 10 percent of workers
participate in either a company-sponsored or individual savings
plan, according to Urata. He says about 700,000 employees have
individual plans which are similar to IRAs in the U.S.
for a total of ¥7.5 trillion ($66 billion) in
Adoption of DC plans in Japan has been slow due to original
restrictions on coverage and contribution amounts, according to
Kawaguchis paper, 2016 Expected Reform of Japanese
DC Code and Its Implications for the Future DC Prevalence in
Japan as Contrasted to U.S. 401(k).
Japan is hardly alone in worrying about retirement savings.
Countries such as Canada, Scandinavia, Chile, and Australia
have devised national plans due to concern about the financial
security of their workforce. Most have what is variously called
Pillar I or a state pension a basic universal retirement
benefit along the lines of Social Security in the U.S. And
while defined benefit pensions have worked as a necessary
supplement for some fortunate workers, especially in the public
sector, theyre decreasing in the private sector
Officials in the U.K. recently found a national solution to remedy its savings
gap. In 2012 it started an auto-enrollment program for
private-sector workers, which has been particularly successful.
By contrast, the U.S. Congress has long been unable to agree on
a national retirement system.
To entice new participants in Japan, some DC plan
administrators have reduced initial setup and ongoing
administration fees to zero for the first few months, according
to Willis Towers Watsons Urata. And investment option
lineups in DC plans are being replaced by more competitive
options to make saving more attractive. When the Japanese DC
program was established, participants were defaulted into
guaranteed investment contracts (GICs) or time-deposit
accounts, similar to CDs in the U.S. Today 60 percent of
Japanese DC participants are in these vehicles, says Urata. As
the low-interest-rate environment has made it difficult for
these accounts to grow, more attractive investment options such
as equity mutual funds are being added to investment menus.
So how did Japan succeed in creating a new savings vehicle
with continued increases to its effectiveness?
The initial draft was proposed in congress in 2015
and, not having aggressive opponents, it then passed in
2016, Kawaguchi writes in an email. He says concerns
about the financial burden of the public pension scheme, as
well as the quest for new solutions, are shared among
politicians regardless of party or philosophy. This observation
echoes the sentiment in the U.K. when the auto-enrollment
scheme was passed by both houses of Parliament in 2010. At that
time, pension experts reported that the legislators had
stronger feelings about providing a universal, low-cost
retirement scheme for millions of uncovered workers than voting
along party lines.
There is still more work to be done in Japan. Contribution
limits are still being addressed, including whether employees
can contribute more than their employers. And asset transfers
to and from DC plans are expected to be deregulated.