The U.S. 401(k) Experience

1
The U.S. 401(k) Experience

• Larry Zimpleman
• Executive VP
• Principal Financial Group
• October 2002

2
Agenda

• How does 401(k) system work?
• Why have 401(k) plans been a success in USA?
• How to succeed in 401(k) market
• 401(k) regulation
• Current issues

3
401(k) Assets Decline
for the Second Year in a Row
4,347 BN
1,638 BN
2011
1994
2001
Source DOL, Cerulli Associates
4
401(k) Market Growth Rates
Source DOL, ICI, EBRI, Cerulli Associates
5
How Does 401(k) System Work?
6
The Key 401(k) Components

• Deferred taxation rule
• Non discrimination and coverage rules
• Matching contribution
• Fund diversification requirement
• Access to fund accounts for emergencies

7
Why Have 401(k) Plans Been a Success in the
United States?They Balance the Needs of Three
Major Social Institutions
Employers
Federal Government
Employees
8
Why Do Employers Benefit from 401(k) Plans?

• Recruit and retain quality employees
• Tax advantages at corporate and employee levels
• A desire by employers to provide a retirement
  plan that does not have open-ended long
  term liabilities

9
Why Do Employees Benefit from 401(k) Plans?

• Employees have access to efficient,
  cost-effective retirement savings funds
  and related services
• Enjoy tax advantages
• Often receive match from employer to further
  grow retirement savings
• Participants control their 401(k) assets
  (investment direction,
  portability, loans)
• Allows accumulation of assets for retirement

10
Why Does Federal Government Benefit from 401(k)
Plans?

• Increases national savings rate
• Source of investment capital¹

Equity
Cash
Bonds
- pension assets
¹ 2000 Employee Benefits Research Institute report
11
Why Does Federal Government Benefit from 401(k)
Plans?

• Builds future tax base
• Tax deferrals, NOT tax losses
• Reduces cost and dependency on governmentally
  provided programs

12
How to Succeed in 401(k) Market

• Commitment to provide comprehensive bundled
  services
• Fund management expertise
• Investment in technology
• Efficient plan administration for employers
• Comprehensive service capabilities for employers
  and employees
• Access to wide array of fund options
• Knowledge of compliance and government reporting

13
401(k) Regulation - A Proper Balance

• Employer has incentive to sponsor plan
• Tax deferrals
• Reward both key and rank and file employees
• Flexible plan design
• Employee protections
• Include rank and file employees
• Ensure assets will be available for their benefit
• Education tools and assistance
• Convenient access to low cost fund choices
  through payroll deduction

14
Current Issues

• Recent bankruptcies (Enron and Worldcom)
• Employer stock limitations
• Asset allocation and advice
• Equity market decline
• Higher contribution limit
• Delayed retirement rules
• Participant needs
• Retirement planning
• Diversification/ advice
• Income management solutions