Japanese Workers to Get 401(k)-Type Savings

June 22, 2001 (PLANSPONSOR.com) - Today Japan enacted a long-awaited law that will bring a version of the American 401(k) savings approach to a nation struggling under the demographic weight of an aging population.

The legislation, which will take effect on October 1, was passed today by a plenary session of the Upper House. It will, for the first time in Japan, allow working individuals to choose how to invest part of their pension money. Under the new system, most investors are expected to, at least initially, invest those funds in low-risk investment trusts.

Japan’s corporate pensions are currently based on a defined benefit system that promises established returns and entrusts all funds to financial institutions.

A Rock and a Hard Place

While aging demographics are challenging a growing number of the world’s pension systems, the high life expectancy and the low birthrate of Japan’s population are creating a dangerous disconnect in the ratio of retirees to working individuals. That ratio could be the highest in the industrialized world over the coming decades.

The government is hoping the 401(K) approach will lighten the financial burden borne by companies supporting the current pension system. Many Japanese firms have suffered heavy losses due to lackluster financial markets and low interest rates. Those troubled corporate pension plans supplement public pension programs, which are also woefully underfunded.

In addition, the government is hoping that the new scheme will spur investment in the country’s depressed stock market, much as the 401(k) plan has for the American market. However, the initial annual contribution limits for employees in corporate pension plans are relatively low ? only 216,000 yen (about $1,700).