Consider Wage Increase Rate and Investment Return Rate When Joining [Geumjjok Pension Snowball②]

Geumjjok Pension Snowball②
DC-Type Relief Pitcher 'Default Option' to Be Introduced Next Month
High Wage Increase Rate for 2030 Generation... Advantageous for DB Type
4050 Generation Worth Trying DC Type
Mandatory IRP Enrollment for Workplaces with Fewer Than 10 Employees

[Asia Economy Reporter Hwang Yoon-joo] With the introduction of the default option, the calculations of retirement pension subscribers are expected to change. The default option is designed to increase the returns of DC-type (defined contribution) retirement pensions. It is a system where the financial company manages the retirement pension in a pre-determined way even if the subscriber does not provide operational instructions.

Recently, with growing interest in financial technology and an increasing number of people managing their pensions directly, there is a rising preference for DC-type retirement pensions. Generally, there is a perception that "DC-type yields are higher." The asset management industry points out that this is a misconception. The most important factors to check when choosing a retirement pension are your wage increase rate and investment return rate.

◇ First, check with your company... Is our company DB or DC? = First, confirm what type of retirement pension you have. It is not your choice. The type of retirement pension depends on the company you work for. When Korea introduced the retirement pension system, most companies chose the DB-type (defined benefit). Recently, there is a trend of switching to DC-type, especially among large corporations. In rare cases, companies with a long history of labor unions may choose a mixed type.

If your current company applies the DC-type retirement pension, you have no choice. By system design, switching from DC-type to DB-type in the middle is not possible. Therefore, the default option will be automatically applied to these from July.

If your company has adopted the DB-type system, you have options. After a certain period, the company will ask employees if they wish to switch to DC-type. However, this only applies if the company has fully funded the retirement pension external reserves. For companies other than large corporations or financially stable mid-sized companies, switching to DC-type is realistically difficult even if desired.

Another important point to note: DB-type subscribers cannot settle or withdraw their retirement pension early. DC-type subscribers can do so under legal reasons (such as purchasing a home for the first time, wage peak system, or medical care for over six months). You can switch to DC-type when deciding on your first home purchase, marriage, or taking a leave of absence. Maintaining DB-type but utilizing system changes during significant life events can be advantageous.

◇ 2030 generation benefits from DB-type... 4050 generation tries DC-type = After confirming your current retirement pension type, you should consider which is more advantageous going forward. DB-type reflects wage increase rates directly. DB-type calculates retirement pay by multiplying the average wage before resignation by years of service. Therefore, those working in companies with labor unions or young workers in their 20s and 30s with high wage increase rates benefit from choosing DB-type.

On the other hand, for workers in their 40s and 50s, wage increase rates are low, around 1-2%. It is reasonable to choose DC-type with the default option applied when preparing for retirement. Investing only in principal-guaranteed products of DC-type retirement pensions yields about 2.5-2.7% annually. Since a pre-designated asset management company operates the pension, the returns are relatively higher than individual management. Especially in volatile markets like now, it is safer than managing the pension personally. Recently, TDF (Target Date Fund) products competitively launched by asset management companies are all aimed at DC-type subscribers.

Son Su-jin, Executive Director of WM Pension Marketing at Mirae Asset Global Investments, said, "Usually, wage increase rates are around 4.5%-5.5% for those in their 20s and 30s, and about 2% for those in their 40s and 50s. After comparing wage increase rates and investment returns, if the former is higher, it is better to choose DB-type; if the latter is higher, DC-type is preferable."

◇ IRP also subject to default option... Essential for industries with frequent job changes = There is also a corporate IRP (Individual Retirement Pension). For workplaces with fewer than 10 employees, IRP subscription has been mandatory since April. IRP is also considered a retirement benefit and is subject to the default option. For industries with frequent job changes or small workplaces, subscribing to corporate IRP is recommended.