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Tuesday, July 17, 2012

401(k)-style plans lure companies


Pension programs based on 401(k)-style defined contributions have increasingly found a way into Japan since their introduction in October 2001, covering more than 4 million workers at about 16,400 companies as of the end of March.

Corporate pension plans in Japan are divided into traditional defined benefit programs and defined contribution plans modeled after the 401(k) retirement savings plan used in the U.S.

The former remains the cornerstone of the nation's business pension system due to its emphasis on stability, according to an official at the welfare ministry.

Outstanding assets under 401(k)-style pension plans currently account for less than 10 percent of the total funds in corporate pension schemes. However, an asset management firm official pointed out that companies managing defined benefit plans for employees are struggling with declining stock markets and razor-thin interest rates.

If these difficulties continue, businesses will be forced to cover pension shortfalls with additional contributions. Some firms have resorted to high-risk investments to avoid such an eventuality but ended up incurring huge losses. But companies sponsoring 401(k)-style plans do not have to worry about extra contributions, as employees invest the funds at their own discretion.

An increasing number of firms are therefore shifting toward such programs, "not because of demand from employees, but due to employers' needs," said Aguri Sagawa of Daiwa Institute of Research.

Financial industry officials involved in corporate pension plans are paying close attention, wondering whether there will be a rapid shift to 401(k)-style plans.

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