Decoding the 401(k): It Can’t Rescue the Stock Market — and It May Widen the Income Gap

Editor’s note: This article restyles a 2011 mainland Chinese television finance discussion, originally written in simplified Chinese, into traditional Chinese; all figures are era data (2007–2010), and “the CSRC” refers to the China Securities Regulatory Commission.

“When job hunting, people ask about salary — and whether the employer pays the ‘five insurances and one fund.'” In 2011, the CSRC cited the US 401(k) plan and urged stronger ties between supplementary pension insurance and capital markets. Markets read it as “China’s 401(k)” arriving: some saw a lifeline for A-shares, others feared pension money being used to prop up stocks. The numbers tell a different story.

What is a 401(k)?

The 401(k) is a supplementary pension plan under Section 401(k) of the US Internal Revenue Code. Funded jointly by employers and individuals with tax incentives, it lets US taxpayers divert part of pre-tax income (say 15%) into a 401(k) account, with matching employer contributions; the money is invested by independent third parties, mainly in mutual funds, drawable only at retirement.

As of 2007, US 401(k) assets totalled about US$3 trillion, invested across mutual funds per statutory ratios, with roughly 20% in equity funds.

Heavy losses in the financial crisis

The OECD’s December 2008 “Pension Markets in Focus” reported:

During the 2008 financial crisis, US 401(k) assets of just over US$3 trillion lost nearly US$700 billion (over 20%). When Enron collapsed, more than 20,000 employees holding company stock in their 401(k)s lost over US$2 billion — staking retirement money on a single company and a single market carries obvious risk.

China’s 401(k): too small to save the market

Broker analysts said the CSRC’s timing aimed both to add funding supply to capital markets and to steady markets with long-term money. But at just over RMB280 billion at end-2010, expecting it to prop up the market was a drop in the bucket; buying stocks on that expectation carried real risk.

Why so slow? And the income gap?

First, tax support was too weak; second, most firms could not afford supplementary pensions on top of statutory social insurance — many SMEs already strained under the statutory burden alone.

The deeper challenge was fairness: firms able to build annuities were mostly large SOEs and foreign companies (the big four banks, oil and petrochemical giants), whose staff already earned more than other sectors; tax breaks for them effectively subsidised high earners with public money, widening the income gap. The programme’s conclusion: what was needed was help in hardship, not icing on the cake; narrowing the income gap so everyone ages with security mattered most — the stock market lacked confidence, not capital.