They may be latecomers to the defined contribution world, but the Japanese are making big strides in retirement savings.
Japan’s most recent effort, which took effect at the start of the year, will expand eligibility in the country’s 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 Japan’s 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 Watson’s Tokyo office. That adds up to around 4.5 million employees, says Tomohiro Kawaguchi, a consultant with Mercer’s 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 assets.
Adoption of DC plans in Japan has been slow due to original restrictions on coverage and contribution amounts, according to Kawaguchi’s 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, they’re decreasing in the private sector globally.
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 Watson’s 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.
