[Interview] 'Default Option Money Move' in Focus... KOFIA Chairman Calls for Investment-Type Didimdol Fund Needed

Default Option Fully Implemented to Increase Retirement Pension Returns
During 1-Year Grace Period, 84% of Total Accumulated Funds Concentrated in Ultra-Low-Risk Products
Average Annual Retirement Pension Return Only 1.94% from 2017 to 2021
Encouraging Retirement Pension Subscribers to Cross the 'Threshold' from Guaranteed to Investment Type

"The default option is about waking up dormant retirement funds and putting them to work. Of course, it’s naturally difficult for ordinary people who are not investment experts to easily cross the threshold from guaranteed products to investment products. It can be done step by step."

On the 12th, when the default option (pre-designated operation system) to increase retirement pension returns was officially implemented, Seo Yoo-seok, chairman of the Korea Financial Investment Association, said in an interview with Asia Economy, "With interest rates high now, it is natural that the proportion choosing principal-guaranteed products is larger than investment-type products because fixed interest rate products have better returns."

Regarding concerns that the introduction’s purpose has been blurred because retirement pensions are still heavily concentrated in ultra-low-risk principal-guaranteed products despite the implementation of the default option, he explained that under the current market conditions, this is the natural choice for financial consumers. The default option accumulated funds for retirement pensions in the first quarter were about 301.2 billion won. Even during the one-year grace period for the default option, 84% of the total accumulated funds, 254.4 billion won, were still concentrated in ultra-low-risk products.

The default option, which was officially implemented from this day after a one-year grace period, is a system where if the subscriber does not give separate operation instructions, the funds are automatically invested in pre-designated products. It was piloted in July last year, but from now on, designation is mandatory. Once designated, if no operation instructions are given, automatic investment occurs after six weeks. If dissatisfied with the default option, one can switch at any time. Since most people subscribe to principal-guaranteed products such as savings and deposits and leave them unattended, the system was introduced with the intention of putting dormant accumulated funds to work. It applies to defined contribution (DC) retirement pensions and individual retirement pensions (IRP). Defined benefit (DB) pensions operated by employers are not applicable.

Chairman Seo said, "There is no need to worry that the default option is not working as originally intended," adding, "Although funds are currently concentrated in 'risk-free' assets, since markets and interest rates continue to change, when interest rates naturally decline in the long term, there will be a time when demand for performance-dividend products within the default option will increase."

He said, "Since the capital market grows like gears, when the cycle turns and the market improves again, funds will move to investment-type products," and added, "It is necessary to prepare more sophisticated products in advance for such times." In particular, he emphasized, "While TDFs (Target Date Funds) based on life cycles are good, retirement pensions are products that need to be managed long-term, so products that are evenly allocated across stocks, bonds, and alternative assets are more necessary."

Chairman Seo said, "Each operator such as banks, securities firms, and insurance companies should be able to recommend portfolios that provide steady and stable returns to financial beginners," and added, "There is a need for funds that can help people accustomed to principal-guaranteed products and fearful of investment products to take the first step and cross the threshold slightly."

He explained, "We are trying to brand such funds like TDFs, and the concept we have developed is called the 'Didimdol Fund'." He continued, "The Didimdol Fund is easy to understand if you think about the National Pension Service. Since its establishment, the National Pension has been managed with assets allocated to stocks, bonds, and alternative assets, achieving an average annual return of over 5%, which results in remarkable returns over 30 years."

He added, "Retirement pensions can achieve better performance with more flexible asset allocation strategies than the National Pension," and reiterated, "Operators should be able to grow the public’s retirement pensions by using fund products with assets evenly allocated to stocks, bonds, and alternative investments, rather than recommending popular theme products at the moment." He said, "The financial authorities also view the concept of such 'Didimdol Funds' positively, and the association will continue active cooperation with the authorities to realize this."

As of the first quarter of this year, the market share of retirement pensions by financial sector showed that banks held 174 trillion won, accounting for more than half (52%), and insurance accounted for 26%, concentrating 87% in banks and insurance. Securities firms accounted for just over 20%. Since retirement pensions focus on principal protection, many customers subscribed through banks. As awareness grows that savings and deposits alone are insufficient for future retirement funds, there is speculation that a 'money move' to securities firms may occur.

In fact, as of the first quarter, securities firms had the highest returns. The retirement pension return rate for securities firms was 2.86%, surpassing banks at 2.25% and insurance at 2.28%. The amount of retirement pension funds flowing into the six major large securities firms through default option products increased by about 84% compared to the previous quarter, reaching 92.3 billion won as of the end of the second quarter this year.

The authorities are also considering a plan not to cancel existing products when switching retirement pension accounts. Asset management companies are focusing on developing various products as the TDF market opens. If the 'Didimdol Fund' promoted mainly by the Korea Financial Investment Association is also introduced, it is expected that the fund market, which has been stagnant due to the contraction of the public fund market, will revive.

Meanwhile, according to the Ministry of Employment and Labor, the average annual return of retirement pensions over five years from 2017 to 2021 was 1.94%. Considering inflation, assets have effectively decreased. The average annual return of retirement pensions in the UK, which actively implements the default option, was 9.9% over the past 10 years, and 8.4% in the US.