401(k)-type retirement
plans finally approved
Long-awaited legislation establishing 401(k)-type retirement plans has finally
passed into law to take effect on 1 October. In June, legislators passed major
pension reform for existing corporate retirement programs which will require greater
oversight and minimum funding requirements beginning next April. Taken together,
these two new laws will require many companies to review their current retirement
programs and to address the responsibilities and opportunities presented by the
new DC and DB plan legislation.
The introduction of DC plans has been eagerly anticipated by employers seeking
alternatives to the traditional DB plans. Corporate pension funds suffered a negative
10% return in the year ending 31 March 2001, creating severe pressures for many
companies already struggling to cover huge pension shortfalls revealed by new
accounting standards.
However, employee reaction to the new 401(k)-style retirement plan is uncertain.
The plans, based on individual accounts, should be attractive to a more mobile
workforce. On the other hand, the shifting of investment management responsibility
to employees will undoubtedly create initial anxiety towards the new plans. To
address this anxiety, the legislation requires employers to provide at least three
investment options with at least one guaranteed-capital fund. Employers must also
provide employees with comprehensive investment education regarding the new DC
plans.
Most employers will still find it necessary to review their existing DB plans
in light of the major corporate pension reform effective 1 April 2002. While the
new DC plans may be favoured by many companies, the annual tax deductible limits
are very low - only Y432,000 (US$3,600) for companies with no other retirement
plans, and only Y216,000 (US$1,800) for companies also sponsoring a DB plan. Employees
are not allowed to contribute to a company-funded DC plan.
The reform of existing corporate DB plans puts in place a new structure requiring
minimum funding, stronger benefit protections for employees, and greater reporting
by plan sponsors. All new plans must follow the new corporate pension structure,
and nearly all existing plans will have to be revised.
A further change on the horizon is legislation to allow cash balance plans, probably
from April 2002. This hybrid plan design guarantees a minimum benefit while providing
some opportunity for additional benefits based on investment returns. According
to a survey by Mitsubishi Trust, nearly one third of employers are considering
a hybrid plan design for providing retirement benefits. Such an approach is expected
to provide greater security for employees while providing employers with an opportunity
to reduce the financial burden of their retirement plans.
The news contained in the
Newsbriefs section of The
Multinational is drawn from the News and Issues section of the Watson Wyatt website.
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