Retirement Systems and Their Contributions to Capital Markets … The 401(k) Experience in the U.S. John J. Palmer

2 Today’s Discussion  Retirement Plans in United States  Role of 401(k) plans  Size and dimensions of market  Economic impact of market  Extension beyond the U. S.

3 The 401(k) Market in U.S.  Enabled through legislation in 1978  Tax deferred defined contribution  Employees contribute voluntarily  Employers often match a percentage

4 The 401(k) Market in U.S.  Employer company matching contribution  Tax qualified plan advantages  Both employer and employee contributions deductible  Investment earnings not taxable until distribution  Tax advantages depend on plan benefits being “non- discriminatory” – not favoring highly compensated employees

5 millions *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin Growth of Defined Contribution Plans: Participants

6 $ billions 10.% *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin Growth of Defined Contribution Assets

7 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin Growth of Defined Contribution Plans

8 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin 401(k) Plan Participation Rates

9 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin 401(k) Plan: Average Participant Account Balance

10 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin 401(k) Plans: Companies with Participant Direction of Investments

11 Defined Contribution Vs. Defined Benefit  Defined contribution  Benefit depends on contribution  Most common  Very little employer cost risk  Defined benefit  Traditional pension plan approach  Based on formula using years of service and employee salary  Employer takes cost risk, depending on investment results, employee turnover, pay increase rates, etc.

12 Growth of 401(k) Market: Contributing Factors  Replacement of defined benefit plans  Lack of tax-favored alternatives  Strength of U.S. economy through growth cycle

13 401(k) Plan Acceptance by Employees  Employees recognize value of benefits  Plans heighten awareness of planning  Personal involvement in decisions  Employees more receptive to saving and investing messages  Often seek additional investing information

14  Cost control  Tax advantages  Attracts and retains motivated workforce  Provides financial and benefit flexibility  Especially attractive to small, mid-size and new companies 401(k) Plan Acceptance by Employers

15  1939 Study:  Improves energy, efficiency  Sustains group interest and responsibility for company profits  Improves employee/employer relations  Reduces turnover  Prevents waste and losses  Promotes self-imposed supervision  Creates market for company securities  Continued research sustains and reinforces  Productivity improvements: 3.5-5% higher in participating companies 401(k) Plan Acceptance: Employer

16 Economic Benefits  Pool of capital invested in stocks of new and established companies  Contributes to growth of economy  Contributes to stability

17 Non-U. S. “401(k)”: Success Factors  Available income from both employer and employee  Clear tax advantages for both  Employer matching of employee contributions  Intense employee education critical to acceptance

Retirement Systems and Their Contributions to Capital Markets … The 401(k) Experience in the U.S. John J. Palmer