1.41 Million Retirees with $1 Million in US 401K Accounts [Geumjjok Pension Snowball⑨]

US '401K' Pension Wealth Foundation
Automatic Enrollment and Automatic Increase Systems Support Advanced Pension Countries
Australia's 'MySuper' Asset Allocation Noteworthy
Diverse Domestic Stocks, Foreign Stocks, Bonds, Infrastructure
Korea's Real Estate Funds Are Practically Regulated

[Asia Economy Reporter Hwang Yoon-joo] "Step 1 to becoming a millionaire after retirement: Max out your 401K contribution limit."

Recently, the 401K, the U.S. retirement pension system, has been gaining hot interest among young Americans. The number of people holding over one million dollars in retirement accounts increased by about 130,000 within a year, showing a growing desire to realize the dream of becoming "pension wealthy." In Australia, the retirement pension system, which yields an annual return of up to 8%, is also gaining attention as a "pension snowball."

◇The ‘401K’ that made Americans pension wealthy… Default options are the top contributor= According to Fidelity Investments on the 16th (local time), as of the second quarter of last year, about 412,000 workers held financial assets exceeding one million dollars in their 401K retirement accounts. The 401K refers to the U.S. retirement pension system. It can be thought of as similar to Korea’s defined contribution (DC) pension plan.

The 401K is a system that frequently comes up when discussing Americans who travel abroad after retirement as "pension wealthy." Along with the 401K, the number of people with individual retirement account (IRA) balances exceeding one million dollars is about 341,600, making YouTube videos comparing the tax benefits between the two accounts popular.

The U.S. was not always a pension leader. Like Korea, it mainly invested in company stocks or safe assets. The change began with the enactment of the Pension Protection Act in 2006. The introduction of △automatic enrollment △default option products △automatic escalation created a new turning point for the U.S. retirement pension system.

Previously, workers had to express their intention to join the retirement pension, but with the introduction of automatic enrollment, they are enrolled unless they explicitly opt out. Also, upon joining the DC pension, the default product (QDIA) is automatically selected as an option. As a result, 98.1% of DC pension plans were decided as default option products, and among these, 87.3% designated target date funds (TDF) as the option product. This expanded the scope of retirement pensions from mainly safe assets to investment products.

Additionally, the introduction of a system that automatically increases pension contribution rates led to significant growth in the retirement pension market. As contribution rates rise, compound interest effects can increase returns. Thanks to these efforts, the average annual return of the U.S. 401K from 2013 to 2019 reached 9.49%.

Song Hong-seon, senior researcher at the Korea Capital Market Institute, explained, "The default option is a plan to invest in risk assets according to retirement timing and calculate average returns," adding, "Korea has also introduced default options, which is meaningful as it can increase retirement pension returns."

(Sydney AFP=Yonhap News) Bondi Beach, Australia

◇Australia’s ‘MySuper’… Asset allocation in stocks, bonds, and alternative investments draws attention= Australia is recognized as a country operating a successful retirement pension default option system. In Australia, "asset allocation" is considered a strength in management. It is characterized by investing in various assets such as overseas stocks (30%), Australian stocks (20%), infrastructure (7.5%), and Australian bonds (7.0%).

Australia was not initially successful in managing retirement pensions. It mandated pension enrollment with the introduction of the ‘Superannuation Guarantee’ in 1992. Unlike Korea, which mainly manages pensions through deposits and savings, Australia allocated about 70% of pension assets to stocks to increase returns.

However, the 2008 global financial crisis highlighted the importance of asset allocation. As returns plummeted and retirement uncertainty grew, the Australian government reviewed the system and reestablished asset allocation principles. This led to the introduction of the default option investment product ‘MySuper’ starting in 2014.

The Australian government required funds managing pensions offering MySuper to provide products that meet conditions such as △diversified investment through a single product △low fees △standardized reporting systems △and opt-out criteria including death and permanent disability insurance.

As a result, since 2010, Australia’s retirement pension average annual return has never fallen below 8%. Notably, MySuper features a high proportion of alternative investments such as infrastructure and real estate funds, accounting for 10-20%. Korea’s default options also allow infrastructure investments, but it is expected to be difficult to achieve the same investment proportions as Australia.

Son Su-jin, head of WM Pension Marketing at Mirae Asset Global Investments, said, "Currently, Korea also permits social overhead capital investments in default options," but added, "In reality, real estate and infrastructure funds are not open-ended funds that can be redeemed at any time, so it is difficult to include real estate and infrastructure products in default option products effectively."