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

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

John J. PalmerJohn J. PalmerJohn J. PalmerJohn J. Palmer

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Today’s DiscussionToday’s Discussion Retirement Plans in United StatesRetirement Plans in United States

Role of 401(k) plansRole of 401(k) plans Size and dimensions of marketSize and dimensions of market Economic impact of marketEconomic impact of market Extension beyond the U. S.Extension beyond the U. S.

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

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The 401(k) Market in U.S.The 401(k) Market in U.S. Employer company matching contributionEmployer company matching contribution

Tax qualified plan advantagesTax qualified plan advantages Both employer and employee contributions deductibleBoth employer and employee contributions deductible Investment earnings not taxable until distributionInvestment earnings not taxable until distribution Tax advantages depend on plan benefits being “non-Tax advantages depend on plan benefits being “non-

discriminatory” – not favoring highly compensated discriminatory” – not favoring highly compensated employeesemployees

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14.621.7

34.9 38.0

47.7

61.5

0

10

20

30

40

50

60

70

1977 1981 1985 1990 1995 2000

millions

*Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin

Growth of Defined Growth of Defined Contribution Plans: Contribution Plans: ParticipantsParticipants

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91185 144

427 385

712864

1,320

1,700

2,500

0

500

1,000

1,500

2,000

2,500

1977 1981 1985 1990 1995 2000

Defined Contribution Assets

401(k) Assets

$ billions

10.%

*Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin

Growth of Defined Growth of Defined Contribution AssetsContribution Assets

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314,000

583,000

673,000760,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1978 1988 1998 2000

*Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin

Growth of Defined Growth of Defined Contribution PlansContribution Plans

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38.3%

57.0%64.6%

80.0%

0%

20%

40%

60%

80%

100%

1983 1998 1993 2000

*Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin

401(k) Plan Participation 401(k) Plan Participation RatesRates

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$13,225

$59,200$65,300

$75,700

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

1978 1994 1995 2000

*Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin

401(k) Plan: Average 401(k) Plan: Average Participant Account Participant Account BalanceBalance

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16.0%10.0%

94.0%

74.0%

92.9%

75.8%

97.0%

84.4%

0%

20%

40%

60%

80%

100%

1978 1994 1995 2000

Own Contributions

Company Contributions

*Source: U.S. Department of Labor, Pension, and Welfare Benefits Administration, Private Pension Plan Bulletin

401(k) Plans: Companies 401(k) Plans: Companies with Participant Direction with Participant Direction of Investmentsof Investments

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Defined Contribution Vs. Defined Contribution Vs. Defined BenefitDefined Benefit Defined contributionDefined contribution

Benefit depends on contributionBenefit depends on contribution Most commonMost common Very little employer cost riskVery little employer cost risk

Defined benefitDefined benefit Traditional pension plan approachTraditional pension plan approach Based on formula using years of service and employee Based on formula using years of service and employee

salarysalary Employer takes cost risk, depending on investment results, Employer takes cost risk, depending on investment results,

employee turnover, pay increase rates, etc.employee turnover, pay increase rates, etc.

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

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401(k) Plan Acceptance by 401(k) Plan Acceptance by EmployeeEmployee ss Employees recognize value of benefitsEmployees recognize value of benefits Plans heighten awareness of planningPlans heighten awareness of planning Personal involvement in decisionsPersonal involvement in decisions Employees more receptive to saving and investing Employees more receptive to saving and investing

messagesmessages Often seek additional investing informationOften seek additional investing information

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Cost controlCost control Tax advantagesTax advantages Attracts and retains motivated workforceAttracts and retains motivated workforce Provides financial and benefit flexibilityProvides financial and benefit flexibility Especially attractive to small, mid-size and new Especially attractive to small, mid-size and new

companiescompanies

401(k) Plan Acceptance by 401(k) Plan Acceptance by EmployersEmployers

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1939 Study:1939 Study: Improves energy, efficiencyImproves energy, efficiency Sustains group interest and responsibility for company Sustains group interest and responsibility for company

profitsprofits Improves employee/employer relationsImproves employee/employer relations Reduces turnoverReduces turnover Prevents waste and lossesPrevents waste and losses Promotes self-imposed supervisionPromotes self-imposed supervision Creates market for company securitiesCreates market for company securities

Continued research sustains and reinforcesContinued research sustains and reinforces Productivity improvements: 3.5-5% higher in participating Productivity improvements: 3.5-5% higher in participating

companies companies

401(k) Plan Acceptance: 401(k) Plan Acceptance: EmployerEmployer

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Economic BenefitsEconomic Benefits Pool of capital invested in stocks of new and Pool of capital invested in stocks of new and

established companiesestablished companies Contributes to growth of economyContributes to growth of economy Contributes to stabilityContributes to stability

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

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

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

John J. PalmerJohn J. PalmerJohn J. PalmerJohn J. Palmer