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US 401(K) plan fires up investors

(Shanghai Daily)

08:26, September 05, 2011




Chinese stock investors are abuzz with talk about the "401(K) project" that could bring US-style retirement savings accounts to China and boost the sagging fortunes of the stock market.

Shang Fulin, president of the China Securities Regulatory Commission, has been promoting the idea since 2004.

In the United States, employees are allowed to deposit part of their earnings in such accounts and not pay income tax on the money until it is withdrawn at retirement.

Interest earned on money in a 401(k) account is not taxed while it remains there. Sometimes employers match the contributions of employees. The money is typically invested by fund managers, with employees getting a marginal say in what kinds of investment they prefer: stocks, bonds, money markets or some combination.

In China, pensions work like this. It is compulsory under the current system for an employee to set up an individual pension account which both the employee and his or her employer have to make a monthly contribution to. The amount varies in different regions. The employee cannot withdraw any money from the account until he or she retires. Upon retirement, he or she receives a monthly stipend from the account.

Chinese securities officials who advocate a US-style system think more retirement savings will flow into markets if people are given the incentive to save more, boosting liquidity and prices.

Every government, of course, wants people to save more for their own retirement to reduce the burden on the public purse.

That's especially true in countries with aging populations, like China, where the proportion of younger, working people who will be paying for old-age care is shrinking.

China's pension fund right now sits just shy of 1.3 trillion yuan (US$203 billion), according to a July report by Zheng Bingwen, director of the world social security research center of the China Academy of Social Sciences.

A 2005 World Bank report estimated that the world's most populous country may see a shortfall of 9.15 trillion yuan in pension funds by 2075.

China's social security funds, including the pension fund, totaled nearly 2.5 trillion yuan by the end of last year, according to Securities Times. The paper also cited an unidentified source as saying that the country's pension fund alone may exceed 10 trillion yuan in 2020.

Advocates of China's 401(K) project claim that the country needs to figure out a way to cover the widening gap in pensions, and what better way to do that than funneling more money into retirement accounts and, in effect, more money into stocks, where returns have historically been higher than on ordinary bank accounts?

China's benchmark stock index, the Shanghai Composite Index, fell 14.3 percent last year and has dropped 8 percent this year. An influx of retirement money might just turn the bear into a bull, advocates hope.

But questions arise.

Will millions of people concerned about their old age be happy to see their money flowing into markets that have suffered much publicized losses and triggered suspicions about corrupt practices and insider dealing?

The idea of a Chinese-style 401(K) account is not really new. In 2004, China began what are called enterprise annuities, or supplementary pensions.

Equal share

Employers and employees pay an equal share of a fixed sum every year to the enterprise annuities and the money can only be withdrawn when the employee retires.

The enterprise annuity market is currently tightly regulated. The trustee, or the employer, must appoint an approved administrator, asset manager and custodian to manage the annuities.

Asset managers are subject to restrictions on investment policy as well. Up to 30 percent of the assets are now allowed to be invested in equities. The manager's fees are capped at 1.2 percent of plan assets and 20 percent of any fees levied must be retained as a reserve to cover any investment losses.


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vikas at 2011-09-05122.177.188.*
plz inform in US 401(K) plan fires up investors
vikas at 2011-09-05122.177.188.*
plz inform in US 401(K) plan fires up investors
Canada at 2011-09-0570.36.49.*
It’s absolutely mandatory to lock pension money in until a person retires or many will use the money to purchase housing, travel, cover loss of income during lay-offs, etc. North American stock markets are a giant fraudulent casino & pension money should not be used for gambling. A Canadian Marxist economist studied the issue & found that pension plans not invested in the stock market did better over a long time horizon. For example, if the stock market declines 22% over 2 years, the pension fund receives a 0% return for 2 years. It may take 4 or 5 years before the stock market goes back up 22%, so there is another 4 or 5 years with a 0% return. During those 6-7 years if pension fund money had been placed in the bank at say 2% interest, the pension fund would have a 12-14% interest rate return. Meanwhile after 6-7 years, the money in the stock market pension fund has only regained what it lost, it will take more years to obtain an additional 12%-14%, and in the interim the pension fund money in the bank continues to earn interest. Depending on the actual stocks held in the stock market pension fund, the decline could be much greater than the stock market decline, taking an even longer period for the stock market fund to break even again.Some of the many pitfalls of Canadian pension plans. If at the time a person retires, their money is tied up in the stock market, and the market has declined, the value of their pension can be severely reduced, they start withdrawing money from the fund, making it impossible to recover their losses when the market goes back up. In instances where there are private sector pension plans with employees & employers jointly contributing to a pension plan, most times the money is held & managed by the corporation. Corporations have sometimes used the money for corporate purposes or have not funded their contributory share when the economy is in a downturn, resulting in large funding shortfalls. If a corporation goes bankrupt, creditors and bond holders are first in line to divvy up any assets, pension funds are last in line, much, or all, of the pension fund is lost. In such cases pensioners get a severely reduced pension, or no pension. A person who has retired has little chance of earning employment income. Some are too old or too frail to go back to work, generally employers want younger employees. Employees in private sector pension plans administered by their corporation have little or no say how their money is invested, and even if they did, they don’t have the financial training to make an informed choice in the complex financial world. Corporations are renowned for mismanaging the pension fund money.Corporations are demanding pensions change from defined benefit plans to contributory plans, whereby plan losses are assumed entirely by the individual pension holder, resulting in lower pensions than expected at retirement time. Also, employers and governments are changing the goal posts right at the time many employees are retiring. There are larger reductions for taking early retirement, and the age at which employees can receive their pension is being increased, often from 65 to 67.A private sector pension fund negotiated by a union with a Marxist leadership is set up as a trust fund at arms length from the corporation, and is jointly managed by the unions and the corporations. If corporations suffer financial difficulties or go bankrupt, corporations can’t touch the money. It is a defined benefit plan, & it survived the last two recent market crashes better than all others. At the time it was set up interest rates were much higher, & the plan was designed based on rates lower than existed at the time, but much higher than now exist. The plan has an actuary shortfall should it be wound up now & required to pay all workers. It recently started investing a small part of the fund in the stock market hoping to recoup the difference, it too suffered from the crash, but this plan is the best of private sector pension plans in Canada. The risks are a declining membership & declining contributions due to lay-offs when the economy is slow, or lay-offs because of technological change, which tend to leave a larger bulge of retirees than existing workers needed to keep funding rolling in.The safest way is for the State to manage pension money. If the private sector manages the money and a pensioner is left with a reduced or no pension at the time of retirement, the State is saddled with the need to find a way to support pensioners. The State would hopefully always put the need of pensioners and their pensions first, not investors or corporations first. If the State wanted to invest in the stock market to make up shortfalls, they could do so at times there has been a large market decline, & then just hold the stocks a short time when the market is going up again. However, determining the market bottom can be difficult.I’m not familiar with details of the U.S. 401k plan, it’s likely similar to Canada’s RRSP plans. The plan benefits those with higher incomes creating greater income inequality.
Wei Siung at 2011-09-05125.162.151.*
youre driven ppls into buying gold?thats not fair.and will bring youre into manipulating goverment in the future,cause youre taught them.
PD User at 2011-09-05114.160.71.*
China needs to be very careful about the soothsayers. The retirement funds is best handled by the Federal Government with dedicated, ethical and prudent experts. The funds should be look at as a source of national capital for funding/investment in blue-chips national infrastructures and national enterprises.It has been proven that there is a lot of fraud going on when the retirement savings were let loose in US, Australia, Canada and UK. In US, the 401(k) capital can lost more than 90 per cent of its capital in just a few months in 2008. I had my superannuation funds in the hands of MLC, an arm of the National Australia Bank, invested in very conservative portfolio, but it lost more than 40 per cent of the capital in just a few months in 2008. I immediately moved the funds into cash deposit within MLC in October 2008, but I should lost only about 20 per cent instead of over 40 per cent before the bottom of the share market value in November 2008. So, there must be fraud going on within MLC itself. As another case in point, I had another superannuation fund with Prudential with one of my financial planner friend that has the same capital amount after seven years with little increase of less than 1 per cent. The interest gained must have been eaten by someone. This illustrate two important points. First, no one will have the expertise and time to manage their own funds. Second, what can the millions of financial planners or fund managers do except to punt/speculate/wager in the share markets. Besides, they will always take a big cut; win or lost. That is why, there are China's citizens stalking since 2004 waiting for China to give up and let loose its gigantic pool of retirements funds.In my own country, our retirement funds are still managed by our Government. It return a conservative five to seven per cent every year which has been proven to be much better than the 401(k). The funds are use to invest in our infrastructures, utilities and other essential services. The country people benefit in indirect returns by getting cheaper subsidised energy as an example. The other unseen benefits is better services from the millions of people employed by the proper utilisation of the funds.The following is always true for China and any other country:1. China is only accountable to all the people. She is not accountable to a single China citizen, who can talk, who is waiting for China to release its pool of reserves for his/her own benefits. Similarly, China is not accountable to a foreigner like Warren Buffet or Rupert Murdoc who is going to bed with a China's citizen to get a slice of the cake.2. China is only accountable to all its enterprises. It is not accountable to a single enterprise like CITIC (CITIC recently attempted with Power Corp of Canada after China declined it something). Similarly, China is not accountable to Morgan Stanley or Goldman Sachs who may be using China's partners to ply open China.3. China is only accountable in running China as a country. China is not accountable to its second-premier. High ranking officials can be bought by big conglomerates in HK or Goldman Sachs as an example. It is certainly not accountable to Joe Biden or Ben Bernake who may lure Chinese officials with incentives.The casino like equity markets is the new opium of the modern era. It is extremely addictive to many. It has the elements of leisure, excitement and little or no work needed at all that is equivalent to entertainment and instant self-gratification with today's on-line internet tools. My uncle who is a China's citizen born in China in the 1950s is semi-retired. He was in the PLA and had held senior civil service post. It was not strange to me that he constantly check the shares performance every now and then, while at home, while driving on the express ways, and cities and even while eating in a restaurant. Since it is highly addictive, with sharks inside and outside of China waiting for a kill, the only recourse for China is still prudently manage the retirement funds for all its citizens.It is a myth that the financial sector will generate high quality jobs. There are very few jobs here and it will benefit only a handful of people. The situation is like the real estate sector such that only a few will benefit while the rest will suffer like what is happening in the US. In the end, it will create a huge imbalance that is not worth even the consideration in the first place.
  

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