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

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

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

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

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

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

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

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

15. 401(k) Plan Acceptance: Employer • 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

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

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