Introduction
The "deficit structure" of corporate defined contribution plans is causing delays in their adoption by small and medium-sized enterprises.
Currently, the Japanese corporate defined contribution (DC) pension market faces a major contradiction. While it is expected to be an important pillar of asset building that complements public pensions,Approximately half of the financial institutions that operate these services are in the red.It is located there.
The main reason for this deficit is that a large portion of the fees that financial institutions receive disappear into subcontracting fees to record-keeping companies known as "record keepers (RKs)." The small profits remaining must cover personnel and system costs, resulting in the following vicious cycle:
- Imposing costs: To cover the deficit, the "trust fees (management costs)" paid by subscribers (employees) tend to be set at a higher level.
- Lack of sales to small and medium-sized enterprises: Sales tend to be skewed towards large corporations rather than small and medium-sized enterprises where profitability is less predictable.
- Disparities in adoption rates: While large companies with over 1,000 employees have implemented approximately 501 TP3T, small and medium-sized enterprises with fewer than 100 employees have only implemented a mere 7.31 TP3T.
In other words, the structural problem that "it doesn't spread to small and medium-sized enterprises because it's not profitable for the operators" is, in a sense, depriving employees of opportunities to build wealth.
Why should small and medium-sized enterprises (SMEs) implement a "corporate-type defined contribution plan" now? Three reasons.
Despite deficit issues and complex structures, the benefits of the system remain undeniable. In fact, in today's inflationary environment, introducing a corporate defined contribution (DC) plan is a powerful tool for small and medium-sized enterprises.
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1. Tax and social insurance benefits for both the company and the employee.
Corporate defined contribution (DC) plans are more than just savings schemes. They offer the following economic benefits:
- Corporate tax reduction: Since the contributions paid by the company can be recorded as "expenses," it can reduce the burden of corporate tax.
- Reduction of social insurance contributions: By adopting an "optional system" where employees contribute a portion of their salary, it is possible to reduce social insurance contributions for both employers and employees.
- Tax exemption on investment gains: Profits earned through investment are tax-free, allowing for efficient wealth building.
2. Improvement of "recruitment capabilities" and "retention rate" (retention effect)
With the current severe labor shortage, job seekers are scrutinizing employee benefits very carefully. The fact that a company has implemented a defined contribution (DC) plan demonstrates that the company is seriously considering its employees' future (retirement), sending a powerful message that attracts top talent.
3. The emergence of a new "low-cost, high-quality" plan that will change industry norms.
The long-held notion that "it's unsuitable for small and medium-sized enterprises because it's unprofitable" is now about to crumble.
- A neutral product lineup: New companies (such as Owners Class) are emerging that are not tied to any particular financial institution and instead carefully select and offer index funds with low trust fees (management costs).
- Expansion of the implementation support system: Foreign asset management companies and others have established "certification systems" to subsidize the implementation costs for small and medium-sized enterprises, thus lowering the barriers to entry.
[Supplement] Essential technical terms and "work perspectives"
To better understand this article, keep the following points in mind.
- What is a Record Keeper (RK)? This refers to a specialized company that records and manages pension subscriber information and asset balances. The operating and management organization pays a fee to this company.
- What are trust fees? This refers to the ongoing costs that investors pay to have their investment trusts (funds) managed. If these costs are high, they will negatively impact long-term investment performance.
💡 Think from a work perspective:
Introducing a company-sponsored defined contribution (DC) plan is not simply an "addition of employee benefits.""A company's commitment to its employees' long-term investment in their life plans."Understanding the structure of the system can change the criteria for judging whether costs (expenses) are viewed as "consumption" or "investment in the future."
Summary: Overcoming the "distortions" of the system and building prosperity together
In the past, pensions were based on a strong sense of trust that the government would protect them. However, in today's world, where population decline and low growth have become the norm, their role is quietly but dramatically shifting from "public pensions" to "asset building through self-help." Defined contribution (DC) pension plans are at the forefront of this change.
Currently, this system is facing a "distortion" in the form of operating losses. The fact that the circulation of fees is not working properly and is creating a barrier to its adoption by small and medium-sized enterprises (SMEs) cannot be overlooked. However, efforts to break down this barrier have certainly begun. Neutral operations not tied to specific financial products and the emergence of subsidy programs to support adoption by SMEs are truly attempts to carve out a "blue ocean."
What we should learn here is not to lament the shortcomings of the system, but to understand its structure and then consider how to find the "optimal solution." For companies, introducing defined contribution plans is not merely a tax incentive or a tool for recruitment strategy. It is a "symbol of trust" that accompanies each employee in the latter half of their life and strives to build prosperity together.
While confronting the "shadow" of the inherent flaws in the system, we must also seize the "light" that new mechanisms will bring, thereby raising the overall level of wealth creation in society. This first step begins with the decisions of business leaders and the wise choices of each individual worker.
