JAPAN LAUNCHES 401(K) TRIAL BALLOON: WHAT’S THE RUSH? GROUP WILL HAVE A PLAN BY 2000

Japan may be a step closer to its own version of 401(k)s, thanks to a recent move by the country’s ruling party.

Last month, the Liberal Democrats said they would study whether to introduce 401(k)-like retirement plans. The announcement was part of an economic stimulus package unveiled Feb. 20. Some experts think the party might decide by midyear whether it wants to introduce legislation permitting such plans. And U.S. investment consultants in Japan, like Frank Russell Co. and InterSec Research Corp., are doing all they can to move along the dialogue.

Even if the party chooses to move forward, it could be another year or two before legislation is passed. Still, it’s a start. Already, a group of representatives from Japan’s ministries of health and welfare, finance, and labor is weighing the defined-contribution concept as part of its wider debate about a corporate pension law in Japan.

business groups in favor

That group’s recommendations are not due for two years. But because of mounting business and political interest in defined-contribution plans, the group could accelerate its work. “We are now discussing our schedule” for making recommendations, says Naohito Takahashi, director of corporate pensions in the Ministry of Health and Welfare.

In the meantime, a number of Japanese business groups are calling for the introduction of defined-contribution plans.

Clearly, it won’t be easy to establish a defined-contribution plan framework. Among the chief problems is loss of tax revenue. To ensure the portability of plans, Japan would need a variation on individual retirement accounts. These would be used by the self-employed or by employees using defined-contribution plans who switch to companies without them. But creating such tax-advantaged vehicles would mean lower revenue for the government.

Other issues to be resolved: what plans would best suit the Japanese culture, what type of systems would be needed for their administration, and how would they fit into Japan’s existing pe
nsion system. Not to mention which ministry would oversee the plans.

Nonetheless, at least some governmental agencies sympathize with the plight of businesses. They recognize the new plans would reduce the burden of funding traditional pensions.

“Many companies are asking” about such plans, says Masanori Tsuno, president of Frank Russell Japan Co. Ltd. in Tokyo. Mr. Tsuno believes defined-contribution plans would be most beneficial when used along with defined-benefit plans.

Especially for larger companies, defined-contribution plans could be popular supplements. But “there are so many companies that have no DB plan. For them, the DC concept is very attractive,” Mr. Tsuno says.

cultural concerns

The demographic argument for 401(k)s also is compelling, says Hiroshi Nakagawa, managing director at InterSec Research Corp.’s Tokyo branch. Compared with Japan’s traditional practice of employment for life with one company, “more people are willing to change their jobs these days,” making pension portability important, Mr. Nakagawa says.

“Last year, the collapse of two major financial firms, including Yamaichi Securities, changed people’s thinking a lot. They recognized that” lifetime employment at one firm is no longer assured — meaning “you must hedge your life,” he says.

A number of Japanese pension sponsors are enthusiastic about defined-contribution plans.

Noboru Yamaguchi, managing director and chief investment officer of the Pension Fund of Japan Travel Bureau in Tokyo, says he personally favors the concept — although no discussions of it have yet taken place at his firm.

Speaking generally, he believes Japan needs to permit 401(k)-like plans. As he sees it, “the Japanese economy may not recover dramatically for another 10 years.”

That could make it difficult for funds to achieve the traditional 5.5% assumed rates of return “without taking big investment risks,” he adds.

But the alternative — lowering assumed rates of r
eturn — also would be a problem: It could force companies to raise their pension contributions.

Not all plan sponsors laud the concept. Tatsuo Narushima, executive director of Nagasakiya Pension Fund in Tokyo, says it collides with the Japanese way of thinking. “Even if defined-benefit plans are performing badly,” he says, “(employees know) the company will take care” of the problem.

Crain News Service