Retire Rich

July 16, 2007

Dept. of Labor to Assist China in Setting up 401(k)s

Recently, the National Bureau of Economic Research issued a report debunking the theory that as the 77 million Baby Boomers begin to turn 65 in 2011 and cash out of their stock and bond holdings, the markets will spiral into a bear market. The bureau's argument is that 401(k) assets currently represent only a small fraction of people's retirement portfolios, and as 401(k)s continue to grow markedly in coming years, the influx of new investments will buoy the markets.

Evidently, the Department of Labor isn't buying that theory. In fact, it's taking the extraordinary step of committing to help China to set up defined contribution plans modeled after those in the U.S., as a first step in laying the groundwork to attract Chinese investors to U.S. markets to counter the massive sell-off of Boomers' assets in coming years.

Jeremy Siegel, famed economist and Wharton professor, has warned that the $6.5 trillion that Boomers hold in stocks and bonds could fall 40% in value if buyers don't step up to the plate, which is why he and many other economists are urging the government and investment firms to pursue investors from nations outside of the U.S.

If China's government eases its capital markets to allow citizens to invest abroad, the Chinese could be one of the biggest purchasing blocks of U.S. stocks and bonds. The world's fastest-growing large economy, China is now trying to build a 401(k)-like pension system.

"The savings and buying power of the developing countries is absolutely critical to our own welfare in the future," Siegel recently told The Sacramento Bee. "When all the Baby Boomers try to sell their assets, there are not going to be enough workers in the developed world alone to absorb them. The demand that would be coming from Asia and other developing countries will be critical to support the prices of these financial assets."

China's Boomer population will be retiring after the Boomers in the U.S. By 2040, about 30% of China's population will be 60 or older, whereas in the U.S., the first wave of 61-year-old Boomers is beginning to take early retirement.

Many in China are optimistic that the nation will successfully build out its capital market, now in its infancy, offer defined contribution plans to its citizens and permit investors to place their money overseas. Fund companies that aren't already planning to look to China should take the Department of Labor's lead.

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