Laurens Vision People are living longer. A man
In the United States, a 401 (k) retirement savings account
aged 65 today expects to live until
takes its name from subsection 410 (k) of the Internal
he is 86 and a woman until she is
Revenue Code. 50 million American employees make their
89. And, as a result of this and low
regular contributions (which can be matched dollar for dollar
fertility rates, in 2010 there were
by their employers) into these accounts. Withdrawal of funds
3 supporting workers for every
is only permitted without penalties after the age of 59.5
pensioner and in 2050 there will
years.
only be 2 workers for every pensioner.
Laurens Vis,
starting to be drawn upon with 60 percent of American
Managing Director, KAS BANK UK
Having been introduced in the 1980s, 401k plans are now
The outlook is a happy one for the
households (in 2011). The outlook for them is dire. The plans
individual, but collectively not so
appear to fall short in general and account for less than
positive. Of the Defined Benefit Plans, 80 percent are now
one-quarter of what is needed in that account to maintain
revealing longevity-related funding voids. And in the UK, the
the standard of living in retirement. The reason for this?
end is predicted for Final Salary schemes. A DB plan does not require the employee to do anything (but Time to change track. The happy individual is kindly asked to
given the opportunity to attend the General Membership
leave the DB waiting room. 58 percent of UK’s DB Schemes
Meeting and keep an eye on Membership Notifications in the
are now entirely closed to new members. 34 percent are
ad-interim). The employee is taken care of by the nature of
closed to further accruals and 18 percent are winding up
the collective arrangement and solidarity between the
completely. The move to DC is picking up speed from
generations.
8 percent in 2001 to 39 percent in 2011. Goodbye Collectivism, Solidarity and Participation. Welcome
But with a DC arrangement, the ball is firmly in the
Individualisation. And individualisation comes at a price.
employee’s court and he/she has to decide what portion of
Because ‘if a 1.5 percent fee is charged every year, both
the income goes towards retirement. With a reduction of
during the period of saving and during the period of pension
taxable income as an incentive, no tax levies over earned
payment, around 40 percent of the potential savings pot will
interest, a choice of mutual funds to invest in, an option to
end up in fees’.
buy company’ stock and the freedom to alternate investment allocations at any time are visible and tempting
A DB plan does not require the employee to do anything
incentives. But there appears to be a snag in the system, as employers can only help their employees to save for their old age. Or
It seems that the Individual or Defined Contribution
adapt the allocation of their savings relative to their changing
arrangement has landed (from the United States) in the UK
lifestyle as they grow older. Or to changing economic
first, before making its way across the English Channel.
circumstances for that matter. But they cannot force them to
Where, for example, only a mere 7 percent of Dutch Pension
make good use of the savings system.
savings have turned the DB corner.
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KAS Selections • May 2012
Recent retirement research has revealed that the adjustment
A fusion of the best parts of DB liability-driven structures and
of asset allocation stalled completely over the crisis period.
DC life style arrangements? Because the good of the
The default for many investors was already to withdraw from
individual is best achieved in what is good for the collective
the market entirely in adverse circumstances, but most
as a whole?
‘401k’ers’ have done nothing at all. With over 40 percent already allocated to equity specific funds, the result has
The pension debate continues. Terms and conditions apply.
been a further ‘near’ paralysed drift into US Stocks.
Please post your comments on: www.mallowstreet.com.
With a DC arrangement, the ball is firmly in the employee’s court However a silver lining is appearing, as the US Labor department is stepping up its efforts to force administrators and investment companies to disclose the cost of the 401k plans. A wave of fee reductions and new investment choices is expected. Under existing rules, fees are typically not disclosed in the annual investor statements. And, as has been stated above, a small fee change can make a big investment return in the long run. Employers are already changing their investment funds line-up to lower fee funds. The majority of which have resulted in a further increase in the proportion of passive equity funds on the 401k account holder’s menu. Because for some time to come, it seems they can ‘check out any time they like, but they can never leave’. This is quite unlike the prospects given to current DB pension savers, when they are kindly asked to seek the risks and returns of investments themselves. As happened 30 years ago in the land of the brave and the free. Hence the quest for a ‘hybrid’ form, where there is a balance between individual shoulders bearing the investment risk of otherwise collectively-driven investments. Guided by professionals on a transparent and competitive fee basis.
KAS Selections • May 2012
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