Latin American Capital Markets

134 KAREN GOLDSTEIN ROSSOTTOplaced pressure on pay-as-you-go retirement systems and increased the need for alternativeways to ensure retirement benefits.Another significant influence on the development of private pension plans inthe United States has been the underlying tax advantages. Corporate pension planswere first made exempt from federal income tax in 1926, but became a significantsource of retirement support in the 1970s after the Employee Retirement Income SecurityAct of 1974 (ERISA) was enacted. 7 ERISA created new disclosure and fundingrequirements for employee retirement plans and raised fiduciary standards governingtheir management. ERISA also allowed otherwise uncovered employees to take advantageof retirement-related tax benefits through the creation of individual retirementaccounts (IRAs). In 1978, defined-contribution 401 (k) plans were created, allowingemployees to make pretax payments into a self-directed investment, such asmutual funds, that may be supplemented with employer contributions. After furthertax reform was enacted in 1981 to broaden pension fund participation to small businessemployees, many employers chose to provide defined-contribution rather thantraditional defmed-benefit plans. By 2000, 35 percent of mutual fund assets representedretirement savings, and more than 42 million 401 (k) accounts contained acombined $1.8 trillion in assets (ICI 2001).Other countries that maintain defined-contribution schemes or a close variantalso tend to have significant institutional investor sectors. For example, Canada encouragespension savings by providing tax advantages for retirement income investeddirectly in mutual funds. In countries that maintain predominantly pay-as-you-go systems,such as Germany and France, where pension fund assets account for only asmall percentage of GDR institutional investors play a less important role in the marketoverall (OECD 2000). Countries with a strong private pension fund system, suchas the United States, the United Kingdom, and Canada, are experiencing declining governmentborrowing needs, while private sector borrowing of corporate bonds, commercialpaper; and asset-backed securities have grown in relative importance (Gaaand others 2001).Institutions' Ability to DiversifyIn addition to tax incentives, institutional investors have offered investors the abilitytttdiversify their portfolio holdings over a broad range of domestic and foreign stocks.In particular, mutual funds with low minimum investment requirements allow individ-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub7 29U.S.C. 1001-1461 (1994).