The Hindu Business Line : Retirement savings' plans: Will it happen soon?

Friday, November 10, was just not like any other day, bracing us simply for yet another week-end. Instead, it was of great consequence to those who care about pension reforms and retirement planning.

Champions of the same would have found reason to revel in the fact that the 401(k), the famed retirement plan in the US, has turned 25 on that day, at a juncture when it covers twice as many workers as traditional pensions.

The emergence of 401(k) as one of the world's leading private retirement systems has in recent days spawned a wealth of studies and reviews, conducted of organisations of various hues. One of these, the Investment Company Institute, is particularly inspiring. It is also quite relevant insofar as a developing country like India is concerned.

ICI, which has billed Defined Contribution (DC) plans as the "mainstay" of retirement security, has underlined 401(k)s have 47 million active participants, more than twice the 21 million workers who are involved in private-sector Defined Benefit (DB) pensions. Also, 401(k)s hold $2.4 trillion in assets (in 2005) compared to $1.9 trillion in all private-sector DB pensions.

Policymakers in India may want to know that as much as 90 per cent of the 401(k)s are the only retirement plan offered by employers. In 2002, roughly 3.5 lakh employers offered these as their sole retirement plans. And three-fifths of those stand-alone plans were started in 1995 or later, it is mentioned.

"The growth in 401(k) plans generally has been fuelled by changes in the economy and the workforce - not by companies dropping traditional pensions in favour of 401(k)s. In particular, newer firms have tended to adopt 401(k) plans. Because traditional pensions generally favour employees with long service with one company, younger workers tend to place more value on defined contribution pension benefits," ICI has pointed out.

Not surprisingly, mutual funds have found their place in it as well. Funds account for approximately 50 per cent of the assets held by the 401(k)s. MFs, in fact, have been instrumental in opening the capital markets for workers participating in 401(k) plans. At the same time, they have been scoring on three major points: diversification, professional management and innovative services.

It has also been found that the 401(k)s provide a "savings tool", one that can give rise to a stream of income. If you are a retired worker, such income can indeed be a blessing. In fact, ICI has established that "more than half of today's young 401(k) participants can expect to retire with enough 401(k) assets to replace more than half of their pre-retirement income". And that's quite something.

ICI has further mentioned that The Pension Protection Act (this was passed in the US in August) has actually made way for sharp increases in 401(k) participation and retirement income. "The Act makes permanent the updated 401(k) (and IRA) contribution limits; preserves catch-up contributions for workers aged 50 or older; and encourages employers to offer automatic enrolment and better default investments in 401(k) plans," it observed.

We wonder whether there is a lesson for us in all this. The average Indian worker, as we all know, has limited access to pension systems. Time and again, we need to tell this to all influential sections - those in politics, administration and public service. The simple point is, if you are a worker, you need to concentrate on your retirement savings. Wouldn't it be nice if the Government too supports your efforts?

Feedback may be sent to nilanjan@thehindu.co.in

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