That's No 401(k)

Japan's skimpy new plans are unlikely to spark a rush

In 1997, Bill Wilder was ready to lead the shock troops of a financial revolution. Japan was creating private pension accounts modeled on the 401(k) plans that were fueling a bull run on the U.S. stock market. Wilder, president of Fidelity Investments in Japan, couldn't wait to sell his financial wares to this country of legendary savers. He hired a team. And waited.

Four long years later, on June 12, 2001, the lower house of the Diet approved a pension-plan bill. On Oct. 1, 2001, Fidelity's first Japanese defined-contribution pension plans will open for business. In theory, companies like Fidelity--and the 100 or so banks and brokerages that are its rivals--should make a killing there. The Japanese have $6.3 trillion in savings socked away.

But Wilder has learned to be cautious. He knows that many Japanese prefer to earn no return rather than take a risk. Moreover, the bill that finally emerged from the Diet is unlikely to spark a rush into the markets. It is a deeply flawed compromise that appeased the anxieties of Japan's unions, companies, and bureaucrats and created a host of problems along the way.

Contribution limits are skimpy, and only the self-employed can put money into their own plans--gutting the 401(k) model. Companies that offer traditional pension plans, which pay workers a lump sum on retirement plus a stipend, can put $1,800 a year per person into the new funds. Companies without pension plans can put in up to $3,600. The self-employed can set aside up to $6,800 tax-free. In contrast, a U.S. worker can set aside a maximum of $10,500 of his pay tax-free--with many companies matching part of their employees' contributions.

"HARD SELL." In Japan's deflationary economy, the plans pose real cash-flow issues. With the new plans, companies make monthly payments. They can't delay provisions for future pension liabilities and use the cash for current needs, a common practice that has left Japanese companies with huge holes in their balance sheets. And with the Nikkei near 16-year lows, conditions aren't propitious for market-based retirement schemes. Anyone whose company offers the option will likely stick with the existing plans--which guarantee a fixed return of about 5.5%--unless they get an incentive payment to switch. And it will be politically impossible for companies to force older workers to do so. "Defined contribution plans will be a hard sell early on," laments Wilder.

It wasn't supposed to be that way. When the government first floated the idea of private pensions in 1998 it had broad support. Japanese companies, which face a combined $580 billion shortfall in their defined benefit plans--12% of gross domestic product--loved the idea of shifting risk to employees. Workers liked the idea of personal, portable pensions and accumulating tax-deferred returns.

Before long, though, interest groups pecked the concept to bits. Unions condemned it as a trick to strip workers of existing benefits. The Finance Ministry objected to losing tax revenue. And companies saw the plans as an administrative headache. The consumer-friendly pension ended up full of unfriendly provisions. For instance, workers who leave the labor force must wait until they are 60 to cash in their accounts. That means a 35-year-old woman who quits her job to raise kids can't touch the money for 25 years. U.S. investors can liquidate funds early with penalties.

The companies that sell mutual funds and administer pension plans have their own complaints. The heavily subsidized Postal Savings system, which holds more than $2.1 trillion of Japanese savings, wants to diversify into selling funds to the self-employed. Since most Japanese make insurance and pension payments at the Post Office, commercial managers will have a hard time getting to them before its salespeople do.

Given these problems, the financial consultant Cerulli Associates Inc. expects the plans to attract only $40 billion in the next few years, half what experts foresaw in 1998, and just 3% of the corporate pension-fund market. And since Japanese invest conservatively, amounts will grow slowly. "The world doesn't realize how traditional Japan is," says David Semaya, deputy-president of Merrill Lynch Investment Managers Ltd., which manages $26 billion in Japanese money, most of it institutional.

Semaya and others are confident that, in time, the new plans will catch on. After all, it took more than 10 years for 401(k)s to become a big factor in the U.S. economy. Still, with all the traps Japan has built into this experiment, a decade may not be enough.

By Ken Belson in Tokyo

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