In the United States, the 401(k) plan can be described as a household name. Although it is only 20 years old, it has quickly become one of the most important employee retirement plans. By the end of 2000, its assets had reached 1.7 trillion US dollars, and the number of participants. Over 42 million. The 401(k) plan has promoted the development of the multi-level pension system in the United States, and the influx of large savings funds has also promoted the prosperity of the capital market.
1. The emergence and development of the 401(k) plan The
a pension plan is one of the “employee benefit” programs provided by American companies. From the end of the 19th century to the present, employers have established a wide variety of pension plans for their employees. Including fixed benefit type, fixed payment type, and so on. To protect the rights and interests of employees, Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 to implement government regulation of corporate pension plans.
The 401(k) plan originated in the early 1980s with the revision of the tax law and the introduction of related tax exemption provisions. Its name comes from Section 401(k) of the Internal Revenue Code, which allows workers to put a portion of their pre-tax wages into a savings plan to accumulate for use after retirement, and on top of that, a new pension plan — “401(k)s” began to emerge and gained widespread popularity, quickly becoming the mainstream of defined-contribution plans. Thanks to a surge in U.S. securities markets, 401(k) assets more than quadrupled in the 1990s, accounting for half of all defined-contribution plans.
2. The main content of the 401(k) plan
As an “employee benefit plan”, the employer is the sponsor of the 401(k) plan and is responsible for the design and management of the plan. According to the latest regulations, as long as five or more employees participate, a 401(k) plan can be established. The employee authorizes the employer to withhold a portion of the pretax salary and deposit it into the employee’s personal 401(k) account. This amount is determined by the employee, but cannot exceed 25% of salary, and cannot exceed a maximum of $9,500 per year (1997 standard). Except in rare circumstances, 401(k) plan members cannot withdraw this amount before age 59.5, otherwise, they will not only be taxed according to the regulations but also have to pay a 10% penalty.
The employer is also the sponsor of the plan. The employer will make some supplementary contributions to the employee’s account according to factors such as the employee’s working years, but the proportion is generally low. Contributions by employers also enjoy tax incentives. For the part paid by employers, employees can obtain full benefits after a certain number of years (up to 7 years).
Because it is a pre-tax contribution, and the government does not tax the dividends, interest, and capital gains earned on the account, it is taxed only when the funds are withdrawn after retirement (and the income tax bracket after retirement is often lower), deferred The tax benefits that come with paying taxes have greatly stimulated the development of 401(k) plans.
When employees retire, they can choose one of the following three methods to receive benefits: (1) All expenses are paid at one time, but the tax rate is about 25%; %-15%; (3) Transfer to the bank without paying tax.
3. Plan administration and investment management
Employers usually establish a committee to manage the 401(k) plan. The members are composed of the human resources department and the financial department. According to ERISA, the members of the committee are “trustees”. Responsible for the implementation and management of the plan.
The administration of the plan includes: drafting plan documents and organizing member meetings; recruiting new employees; submitting relevant documents to the government; preparing relevant financial reports for members and beneficiaries; providing investor education; applying for loans to plan members Or applying for withdrawal for approval; save documents and more.
Account management is an important part of administrative management. The development of science and technology enables many financial institutions and consulting institutions to provide one-stop services including fund transfer, investment variety conversion, tax treatment, daily net worth calculation, call center, Internet, etc. With a series of fast services, employees can easily understand account information and timely investment conversion.
Because the 401(k) plan is a long-term capital accumulation plan based on personal accounts, it is up to the individual investor to decide how much money to invest, how to invest, and what kind of risk to take. Many employees start paying contributions at a young age and have a high risk-return preference for their portfolios, so the fund has always had high exposure to equities. The recent trend is to transfer options to individual employees, so-called “employee-managed” plans, thereby allowing employers to avoid further obligations and risks. The popular method is: the trustee selects some fund products with suitable risk-return characteristics with the help of a consulting agency and makes an investment catalog for employees to choose investments, and employees can choose or replace the catalog products by themselves. Section 404c of ERISA requires plan sponsors to offer employees at least three types of investment products with significantly different risk-return characteristics, and the investment catalog is updated at least every three months.
4. The design and operation process of the plan
The design and management of a typical 401(k) plan can be divided into the following five steps:
The first step is to establish the plan and objectives of the enterprise. The main tasks include statistics on the status of enterprise personnel, questionnaire survey on employees’ existing investment structure, analysis and decision of budget. Some inexperienced companies often resort to external consulting agencies.
The second step is to choose management methods and management institutions. Management methods include hybrid and separate management. Hybrid management refers to the integration of roles such as administrative management and investment management. When choosing a management agency, companies often send an inquiry letter first, then analyze the questionnaires received, select a suitable candidate agency for “interviews”, and then use on-site visits to finalize the 401(k) plan. managers.
The third step is to formulate an investment “menu”, that is, to analyze the investment tools in the market and the employees’ existing asset portfolios and investment preferences to determine the investment categories of the fund.
The fourth step is to choose the type of fund. The trustees of most employee-managed plans usually select some investment fund products for employees to choose from based on the relevant information and the recommendations of professional institutions.
5. The fifth step is performance monitoring.
The trustee is obliged to monitor the performance of the selected fund varieties and replace them immediately if they are found to be inappropriate.
In addition to the above five steps, the trustee also has the obligation of “member communication” during the whole plan operation process. And encourage more employees to join the program.
