Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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Among the financial consequences of externally funding your retirement allowance plan are:
- Loss of deductions from income for advance accruals of future benefit expenses,
- New administrative expenses imposed by the carrier,
- Lower expected net ROI,
- New investment expenses, and
- An asset tax of about 1.173%.
The first four are completely unavoidable. The last is temporarily avoidable for smaller employers if they are willing to make some design changes and incur a smaller cost.
The reason we call it temporary is that we expect most companies to grow and eventually surpass the participant limit for this tax-break. If a company wished to preserve the tax-break, they would have to join or establish an EPF after passing the size threshold.
The design limitations concern the size of the lump sum in relation to life annuity options under the plan. The lump sum cannot exceed the value of the guaranteed portion of the life annuity and it cannot exceed 90% of the value of the life annuity.
Recognizing that most Japanese plans define the lumpsum, the favored optional form, and calculate the annuity options from it, we realize that there is some flexibility in how we define the annuity options. Clearly, they represent an extra cost to the plan when they are selected.
To minimize that cost, the plan sponsor should not permit annuities options with short guaranteed payment periods and the normal retirement date should be as late as possible.
Since there is a significant premium in the perceived value of a lump sum versus an annuity in Japan, these restrictions should help keep the percentage of retirees choosing annuities low. Keeping this percentage low will help keep actual plan costs low, despite the tendency by Japanese carriers to price on the most expensive option, ignoring selection rates.
Implementing these precautions for a typical Japanese plan will mean a 10% increase in premiums for a typical sponsor, but a decrease in actual long-term costs. A plan with assets exceeding payroll should typically see a net reduction in annual outgo after the 10% premium increase.
The typical (if there really is one) expatriate support package tends to use general tables to develop the levels of housing and COLA support. When these tables are rented from companies recognized for their expertise in international cost issues, they represent a fair adjustment for many employees. Of course, they can never exactly equal the additional costs any one employee will experience;
- Spending patterns before relocation are always different from those assumed in the tables, and
- Spending habits will change after relocation.
Can a sponsoring organization just quit, having selected tables it feels are appropriate for their situation? We think not.
Many companies have additional employment benefits that are considered "no-cost" in the home country, but are a real, tangible value to the employees. Examples abound;
- Discounts on newspaper/magazine subscriptions,
- Discounts (sometimes to 100%) on premium merchandise (hats, T-shirts, beach towels, coolers - typically with logos) and the company's product line (beer, computers, ice cream, videos),
- Free "defective" products (chocolate, mmm - I'd like to work there).
- On-site child-care.
Of course there are others. Such benefits typically help keep a company's employment costs low in the home country. In the target country, especially for a start-up situation, such benefits will not be available. The sponsor must take this into account in developing packages that will attract the right individuals.
As with all employment matters, the advantage of a reduced need for management attention may make up for the increased costs of a standard program for all transferred employees. But, individual negotiations can also make sense.
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