The U.S. 401(k) Experience Larry Zimpleman Executive VP Principal Financial Group October 2002

2 Agenda How does 401(k) system work? Why have 401(k) plans been a success in USA? How to succeed in 401(k) market 401(k) regulation Current issues

3 401(k) Assets Decline for the Second Year in a Row $1,638 BN $4,347 BN Source: DOL, Cerulli Associates

4 Source: DOL, ICI, EBRI, Cerulli Associates 401(k) Market Growth Rates

5 How Does 401(k) System Work? Recordkeeping & Service: * telephone, Internet, CSA * member education/calculators * financial advice ERISA IRS Sets regulations for plan sponsors in the best interest of plan participants 401(k) Provider Recordkeeping & Service: * investment management * keeps participant and plan records * performs plan level testing and reporting Plan Sponsor Participant Pre-tax $$ Pre-tax $$ + match

6 The Key 401(k) Components Deferred taxation rule Non discrimination and coverage rules Matching contribution Fund diversification requirement Access to fund accounts for emergencies

Why Have 401(k) Plans Been a Success in the United States? They Balance the Needs of Three Major Social Institutions: EmployersFederal Government Employees

8 Why Do Employers Benefit from 401(k) Plans? Recruit and retain quality employees Tax advantages at corporate and employee levels A desire by employers to provide a retirement plan that does not have open-ended long term liabilities

9 Why Do Employees Benefit from 401(k) Plans? Employees have access to efficient, cost-effective retirement savings funds and related services Enjoy tax advantages Often receive “match” from employer to further grow retirement savings Participants control their 401(k) assets (investment direction, portability, loans) Allows accumulation of assets for retirement

10 Why Does Federal Government Benefit from 401(k) Plans? Increases national savings rate Source of investment capital¹: Equity Bonds Cash ¹ 2000 Employee Benefits Research Institute report - pension assets

11 Why Does Federal Government Benefit from 401(k) Plans? Builds future tax base –Tax deferrals, NOT tax losses Reduces cost and dependency on governmentally provided programs

12 How to Succeed in 401(k) Market Commitment to provide comprehensive bundled services Fund management expertise Investment in technology –Efficient plan administration for employers –Comprehensive service capabilities for employers and employees –Access to wide array of fund options Knowledge of compliance and government reporting

13 401(k) Regulation - A Proper Balance Employer has incentive to sponsor plan: –Tax deferrals –Reward both key and rank and file employees –Flexible plan design Employee protections: –Include rank and file employees –Ensure assets will be available for their benefit –Education tools and assistance –Convenient access to low cost fund choices through payroll deduction

14 Current Issues Recent bankruptcies (Enron and Worldcom) –Employer stock limitations –Asset allocation and advice Equity market decline –Higher contribution limit –Delayed retirement rules Participant needs –Retirement planning –Diversification/ advice –Income management solutions