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Company allowing switch from DC Plan matching to iDeco
Posted: Tue Aug 16, 2022 4:54 am
by 7-seasons.com
Has anyone faced or is facing this decision whether to do a company DC Plan Matching contribution versus personal iDeco contribution?
I was originally leaning towards Matching because the company pays the annual account management fees so the total tax reduction is greater than iDeco (DC Plan 18,000 tax reduction vs. iDeco 12,324 annually), but when I went to check the funds again the iDeco has far more fund options to choose from (slim, etc.). The main fund that I have chosen and one of the lowest expense ratios for the DC Plan is 0.34% and includes dividends while the IDeco plans have many options about 0.14% and below. The diversification options are more varied for iDeco as well.
The DC Daiwa Global REIT fund has dividends included despite the 0.34% expense ratio. Looking online the yield is just over 2.9%. All of the slim funds that I checked in the iDeco show dividend yield at zero. The dividend yield would more than cover the ~0.2% difference in expense ratio versus all of the fund options I see in iDeco.
Summary: greater tax reduction with DC Plan (5,676¥ annually), slightly higher 0.2% expense ratio in the main fund but including dividends (in 1 fund) versus lower fund fees <0.15% and more diversification options with iDeco.
So unless there is some slight of hand with fees and dividends that I am missing it seems the DC Plan is the better option because of the one fund that has dividends included.
Anything else I should be considering here and is a deal-breaker or veto for one or the other?
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Tue Aug 16, 2022 5:06 am
by zeroshiki
Distributing dividends also affect the fund itself in that it slows growth at a time when you don't exactly need the money from them.
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Tue Aug 16, 2022 6:46 am
by adamu
I think the instant 100% return from the matching contribution is going to beat any alternative.
edit: nevermind, corrected by ClearAsMud below.
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Tue Aug 16, 2022 9:52 pm
by ClearAsMud
adamu wrote: ↑Tue Aug 16, 2022 6:46 am
I think the instant 100% return from the matching contribution is going to beat any alternative.
I wonder if you haven't made the same mistake I did when I first heard about "matching" in corporate DC pension plans, namely assuming that the employer adds matching funds to whatever extra amounts the employee contributes to the plan. That is not the case.
"Matching" in the context of Japanese corporate DC pension plans means only that the employee can add their own contributions to the plan up to the fixed amount contributed by the employer, thus "matching" the employer's contribution. Two conditions are stipulated: 1) the employee's contribution cannot exceed that of the employer, and 2) combined contributions are limited to a total of 55,000 yen per month (or 27,500 yen per month if the employer also has a DB pension in place).
Thus, if an employer fixes its contribution at, say, 20,000 yen per month, the employee can only add up to another 20,000 yen (first limitation). If the employer contributes 40,000 yen a month, the employee can add only another 15,000 yen (second limitation). In either case, the employer's contribution remains the same.
OP's question -- which I'm not really able to answer since I have no iDeCo experience -- seems to be basically whether the savings in administrative fees provided by participating in matching would outweigh the greater choice available in a personal iDeCo. Knowing the company's conditions for its plan would seem to be a key factor here, since iDeCo limitations differ for a company employee based on whether the employee is enrolled in a DC plan or not. As I understand it, the maximum iDeCo contribution possible for an employee in a corporate DC pension plan is 20,000 yen a month. If the company is contributing more than that to its DC pension, the employee will able to "match" that amount -- up to a combined total of 55,000 yen -- meaning that the employee might actually be better off participating in the DC plan because more tax-free contributions can be made. But it depends on the details of the company's plan, so I would encourage a careful reading of the conditions, and OP should probably also take considerations like portability into account.
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Tue Aug 16, 2022 11:34 pm
by adamu
ClearAsMud wrote: ↑Tue Aug 16, 2022 9:52 pm
adamu wrote: ↑Tue Aug 16, 2022 6:46 am
I think the instant 100% return from the matching contribution is going to beat any alternative.
I wonder if you haven't made the same mistake I did when I first heard about "matching" in corporate DC pension plans, namely assuming that the employer adds matching funds to whatever extra amounts the employee contributes to the plan. That is not the case.
"Matching" in the context of Japanese corporate DC pension plans means only that the employee can add their own contributions to the plan up to the fixed amount contributed by the employer
Yes, this is exactly what I assumed. Sorry 7-seasons!
zeroshiki wrote: ↑Tue Aug 16, 2022 5:06 am
Distributing dividends also affect the fund itself in that it slows growth at a time when you don't exactly need the money from them.
Dividends are always reinvested in iDeCo. For funds that do not pay out a dividend, they reinvest internally, reflected in faster growth of the fund. For funds that pay out, the money reinvested by the iDeCo account (I'm not sure if it's reinvested into the same fund, or added to your monthly contribution and distributed according to your asset allocation. This information is surprisingly difficult to find).
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Wed Aug 17, 2022 12:45 am
by 7-seasons.com
ClearAsMud wrote: ↑Tue Aug 16, 2022 9:52 pm
adamu wrote: ↑Tue Aug 16, 2022 6:46 am
I think the instant 100% return from the matching contribution is going to beat any alternative.
I wonder if you haven't made the same mistake I did when I first heard about "matching" in corporate DC pension plans, namely assuming that the employer adds matching funds to whatever extra amounts the employee contributes to the plan. That is not the case.
"Matching" in the context of Japanese corporate DC pension plans means only that the employee can add their own contributions to the plan up to the fixed amount contributed by the employer, thus "matching" the employer's contribution. Two conditions are stipulated: 1) the employee's contribution cannot exceed that of the employer, and 2) combined contributions are limited to a total of 55,000 yen per month (or 27,500 yen per month if the employer also has a DB pension in place).
Thus, if an employer fixes its contribution at, say, 20,000 yen per month, the employee can only add up to another 20,000 yen (first limitation). If the employer contributes 40,000 yen a month, the employee can add only another 15,000 yen (second limitation). In either case, the employer's contribution remains the same.
OP's question -- which I'm not really able to answer since I have no iDeCo experience -- seems to be basically whether the savings in administrative fees provided by participating in matching would outweigh the greater choice available in a personal iDeCo. Knowing the company's conditions for its plan would seem to be a key factor here, since iDeCo limitations differ for a company employee based on whether the employee is enrolled in a DC plan or not. As I understand it, the maximum iDeCo contribution possible for an employee in a corporate DC pension plan is 20,000 yen a month. If the company is contributing more than that to its DC pension, the employee will able to "match" that amount -- up to a combined total of 55,000 yen -- meaning that the employee might actually be better off participating in the DC plan because more tax-free contributions can be made. But it depends on the details of the company's plan, so I would encourage a careful reading of the conditions, and OP should probably also take considerations like portability into account.
Some good points in there. Ah I see the limit for iDeco if there is a company pension plan is 12,000, the same amount I am matching/topping up? with now so no difference there. I will have to try and find the terms around the plan overall and see if there are any gotchas in there.
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Wed Aug 17, 2022 12:46 am
by 7-seasons.com
adamu wrote: ↑Tue Aug 16, 2022 11:34 pm
ClearAsMud wrote: ↑Tue Aug 16, 2022 9:52 pm
adamu wrote: ↑Tue Aug 16, 2022 6:46 am
I think the instant 100% return from the matching contribution is going to beat any alternative.
I wonder if you haven't made the same mistake I did when I first heard about "matching" in corporate DC pension plans, namely assuming that the employer adds matching funds to whatever extra amounts the employee contributes to the plan. That is not the case.
"Matching" in the context of Japanese corporate DC pension plans means only that the employee can add their own contributions to the plan up to the fixed amount contributed by the employer
Yes, this is exactly what I assumed. Sorry 7-seasons!
zeroshiki wrote: ↑Tue Aug 16, 2022 5:06 am
Distributing dividends also affect the fund itself in that it slows growth at a time when you don't exactly need the money from them.
Dividends are always reinvested in iDeCo. For funds that do not pay out a dividend, they reinvest internally, reflected in faster growth of the fund. For funds that pay out, the money reinvested by the iDeCo account (I'm not sure if it's reinvested into the same fund, or added to your monthly contribution and distributed according to your asset allocation. This information is surprisingly difficult to find).
Interesting. That is not clear at all when looking at "dividend yield" and all funds are zero. I might have to fish around to confirm they are reinvested for each fund somewhere else on the info pages.
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Wed Aug 17, 2022 2:06 am
by 7-seasons.com
Just rounding this out as I think this was a Japan law change not just my company.
DC Plan requires 3 years of contributions minimum or the whole company contribution will be refunded back to them.
DC Plan can be cashed out earlier than iDeco depending on total years of contributions ranging from 3 years, age 64 to 10+ years, age 60.
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Thu Aug 18, 2022 2:55 am
by Roger Van Zant
I wish I could get out of my company DB plan!
I pay in 10,000 yen every month and my company contributes a further 500 yen! How generous!
I joined before I knew anything about iDeCo. My iDeCo limit is now 12,000 yen per month as opposed to 23,000 if I were not paying into the DB scheme.
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.
The only way I can get out of the DB though is by retiring or leaving my company....
Re: Company allowing switch from DC Plan matching to iDeco
Posted: Thu Aug 18, 2022 11:07 am
by Tkydon
Roger Van Zant wrote: ↑Thu Aug 18, 2022 2:55 am
I wish I could get out of my company DB plan!
I pay in 10,000 yen every month and my company contributes a further 500 yen! How generous!
I joined before I knew anything about iDeCo. My iDeCo limit is now 12,000 yen per month as opposed to 23,000 if I were not paying into the DB scheme.
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.
The only way I can get out of the DB though is by retiring or leaving my company....
But the Tax on the DB scheme will be very very low.
Firstly, if/when they pay you out as a lump sum, you get to deduct the Special Deduction of 400,000 per year for the first 20 years and 700,000 per year for any years over 20 years.
Then you divide what ever is left by 2, and that is then taxable at standard marginal Tax Rates. This is taxed completely stand-alone, and has no effect on, or is not affected by any other income in the same Tax Year. The tax will be very low.