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Retirement Systems and Their Contributions to Capital Markets … The 401(k) Experience in the U.S. John J. Palmer
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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.
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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
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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
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5 millions *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin Growth of Defined Contribution Plans: Participants
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6 $ billions 10.% *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin Growth of Defined Contribution Assets
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7 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin Growth of Defined Contribution Plans
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8 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin 401(k) Plan Participation Rates
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9 *Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin 401(k) Plan: Average Participant Account Balance
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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
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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.
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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
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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
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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
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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
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16 Economic Benefits Pool of capital invested in stocks of new and established companies Contributes to growth of economy Contributes to stability
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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
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Retirement Systems and Their Contributions to Capital Markets … The 401(k) Experience in the U.S. John J. Palmer
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