401(k) Plan For India? Amfi Proposes 'MF-VRA' Plan To Enhance Social Security And Increase Pension Coverage

The Association of Mutual Funds In India (Amfi) has proposed the creation of a voluntary retirement scheme in India which is managed by mutual funds. The industry body has proposed that the scheme should be similar to the US 401K. Amfi also mentioned that the scheme can potentially unlock long-term capital for the economy and provide structured retirement security to a wider population.

What Is Amfi's MF VRA Proposal

The proposed Mutual Fund- Voluntary Retirement Account (MF-VRA) scheme aims to provide a voluntary, employer-linked retirement product managed by mutual funds. As per Amfi's whitepaper, the new scheme should offer features such as voluntary participation, employer-sponsored options, tax incentives, portability and flexibility.

Voluntary Participation

Amfi stated that the new MF-VRA scheme will be open to all individuals, with or without employer involvement and regardless of their employment status. By allowing individuals, irrespective of their employment, to apply for the scheme, Amfi plans to allow freelancers, self-employed individuals, and those in the gig economy to plan their retirement.

Employer-Sponsored Option

The MF-VRA scheme also seeks to urge employers to contribute to their employees pension similar to the 401(k) plan which is offered to employees in the US. As a part of the plan, employers will contribute a fixed percentage of the employee's salary to the MF-VRA account, matched by the employee's own contributions. Amfi has also proposed that the Centre can offer tax benefits like deductions on the employer's contributions or exemptions on the employer's payroll taxes.

AMC Managed Schemes

The MF-VRA accounts will be managed by mutual fund companies and involve investment in schemes focused on lifecycle investing. Notably, lifecycle investing consists in allocating assets across asset classes based on the individual's age, risk tolerance, and retirement goals.

Tax Incentives

Amfi has also urged the Centre to consider providing tax-deductions for investment in MF-VRA accounts similar to Sec 80C and NPS with possible additional deductions.

Portability & Flexibility

Amfi has also proposed to make investment in MF-VRA schemes transferable across jobs and customizable risk-return profiles. Additionally the mutual fund company will be able to offer a variety of investment options and allow individuals to choose from conservative, moderate, or aggressive investment strategies.

Withdrawal Rules

The MF-VRA scheme seeks to restrict access to the funds invested in the scheme before the age of retirement. However, exceptions will be allowed for hardships wherein an individual faces unforeseen circumstances like medical emergencies, disability, or death.

Amfi's Rationale Behind the MF-VRA Scheme

The industry body cited the United Nations' projection, which estimates that the elderly population will make up 21 per cent of the total population of India by 2050. Presently, the elderly population makes up 11 per cent of India's total population.

The number of elderly people in India is set to grow to more than 346 million by 2050, second only to China, 504 million. On the other hand, India's coverage under mandatory pension schemes is low, with only 27.2 per cent of the population aged between 15-64 years having coverage as per data from the Organisation for Economic Cooperation and Development (OECD). Thus, shifting demographics and the limited reach of pension programmes create the need for diversified retirement savings solutions as per the Amfi.

The Amfi has proposed the MF-VRA scheme to leverage the growth of mutual funds in India and create a diversified retirement savings solution. The Amfi also stated that ultimately the success of the MF-VRA scheme in providing financial security amid the changing age demographic depends on several stakeholders collaboratively working together.

Amfi urged Sebi to define the MF-VRA product structure and create reporting standards for the same. The industry body urged the Central Board of Direct Taxes to allow for tax deductions for MF-VRA investors.

The industry body also urged the Ministry of Labour & Finance to coordinate with the Employees' Provident Fund Organisation (EPFO) and the National Pension System (NPS) to establish portability provisions for the MF-VRA scheme and to Asset Management Companies to create "Retirement Lifecycle Funds".

Amfi also urged employers to offer a co-contribution model voluntarily and for fintechs and distributors to create user-friendly onboarding and goal-tracking tools.