Japan Allows for Employee Contributions to DC Plans

August 19, 2011 (PLANSPONSOR.com) - A new pension bill that allows employees to contribute to defined contribution (DC) plans on a pretax basis passed in the August 4, 2011 Diet session in Japan.

Towers Watson reports employee contributions will be permitted in employer-sponsored DC plans effective January 1, 2012. There are two types of DC plans in Japan: employer-sponsored, established and maintained by companies for their employees, and individual, available to the self-employed and those whose employers do not sponsor a plan.  

Under the bill, combined employer and employee contributions must remain within the existing monthly DC contribution limits (i.e., ¥51,000) in the absence of an externally funded DB plan or ¥25,500 if the employer also sponsors an externally funded DB plan. Employee contributions cannot exceed employer contributions.  

For example, if the applicable DC contribution limit is ¥51,000: 

  • If an employee receives an employer contribution of ¥40,000, the employee would be permitted to contribute up to ¥11,000. 
  • If an employee receives an employer contribution of ¥20,000, the employee could contribute up to ¥20,000. 
  • The potential employee contribution is maximized with an employer contribution of ¥25,500. 

According to Towers Watson, DC plans were introduced in Japan 10 years ago (October 1, 2001), and have grown steadily over the decade to approximately ¥5 trillion in assets, over 15,000 employer sponsors and four million participating employees. The introduction of pretax employee contributions will be the most significant change since the introduction of the DC regulations.  

  • Other important DC plan provision changes in the same pension bill are: 
  • The expansion of participation eligibility to age 65 (currently age 60); and 
  • Strengthened requirements for continuing education to plan participants. 
Towers Watson said the opportunity for employees to contribute, reduce income taxes and have an additional retirement savings plan should be powerful incentives to increase employees’ interest in retirement plans. However, DC plan sponsors should carefully set definitions for employer contributions. A percentage-of-salary approach (currently the most common) may lead to administrative difficulties for HR because of the different ceilings for employee contributions and result in varying opportunities for pretax savings among employees.