[Practical Finance] Mastering Default Options Completely... You Too Can Become a Pension Millionaire

Kwon Yong-su, Head of Retirement Research at Samsung Securities
Achieves Performance Exceeding Target Returns
Need to Review Management Performance and Changes

The default option (pre-designated management system), introduced in July last year to improve the return on retirement pensions, was officially implemented on July 12 after a one-year grace period including prior preparation. The Ministry of Employment and Labor and the Financial Supervisory Service disclosed the sales and management performance of default option products as of the end of the second quarter. Among 296 approved products, 223 products are being sold and managed, with a total accumulated amount of approximately 1.1 trillion KRW, an increase of 800 billion KRW compared to the first quarter. The average 6-month return of the managed products was about 5.8%. Following the first quarter, it showed a higher return compared to the target return (annual return of 6?8%). However, the number of subscribers who designated the default option is still only 2 million, showing a low subscription rate (about 31%) among all eligible participants.

According to an in-depth survey conducted by Samsung Securities targeting defined contribution (DC) and individual retirement pension (IRP) customers (September 2023, 3,400 respondents aged 55 or younger DC and IRP subscribers), only 38% of subscribers had set the default option, and 22% responded that they did not know whether they had set it, indicating that subscribers do not fully understand the purpose and content of the system. Even among those who had already set it, only 38% had sufficient understanding of the system, suggesting a need for more proactive provision of information related to the system.

As of the end of 2022, the total assets of retirement pensions exceeded 331 trillion KRW. Among these, DC and IRP assets reached 140 trillion KRW, with over 70% of these assets allocated to principal-guaranteed products such as deposits. Compared to advanced cases like the United States and Australia, where pension assets have significantly increased through appropriate asset allocation investments over a long period, individual retirement pension subscribers are missing opportunities to improve pension asset returns due to lack of interest and information.

The retirement pension default option was introduced as a means to improve inappropriate management methods of pension assets. Successful cases from major countries that introduced this system earlier than Korea served as models. In the United States and Australia, since the introduction of the default option, an average annual return of over 8% has been achieved for about 10 years, playing a key role in the emergence of so-called 'pension millionaires.' Therefore, if subscribers increase their understanding of the default option and use it appropriately, it is expected to greatly help maximize pension assets.

4 Steps to Properly Utilize the Default Option

① Check the type of retirement pension enrolled = Since the default option applies only to DC and IRP, where subscribers directly manage assets, it is necessary first to identify the type of retirement pension you are enrolled in. You can inquire with your company's retirement pension officer or use the Financial Supervisory Service’s Integrated Pension Portal website to check various pension information, including the type of retirement pension, accumulated pension amount, and pension service providers (financial companies). Moreover, each pension service provider regularly provides subscription guidance through various channels to subscribers who have not set the default option, so paying attention to information delivery from financial companies can prevent pension assets from being neglected.

② Select a default option product that matches your investment propensity = You can visit the branch of the pension service provider where your DC or IRP is enrolled or use a mobile application (app) to select a default option offered as a set menu composed of several financial products according to your investment propensity. First, identify your investment propensity through a simple survey, then choose one from several products that suit your profile by reviewing the characteristics of past performance products.

Default option products are structured into four levels of investment risk: ultra-low risk, low risk, medium risk, and high risk. These products have passed the review and approval process by relevant authorities. The Ministry of Employment and Labor examined interest rates, early termination penalties, and continuous subscription availability for principal-guaranteed products, and checked past management returns, asset allocation status, and appropriateness of fees for funds. To strengthen retirement security and ensure successful system implementation, interest rates for principal-guaranteed products were set higher than before, and fees for funds were lowered compared to previous levels, making these the most rational management methods. Additionally, the Ministry of Employment and Labor’s website and the Financial Supervisory Service’s Integrated Pension Portal regularly disclose the returns of default options by each pension service provider, which can help in making selections.

③ Check and review management status = When you select a default option product, if there is no management instruction for new funds in DC or IRP accounts for two weeks, or for matured funds such as deposits for four weeks, the subscriber is first notified that 'after two weeks, funds will be managed under the default option product,' and after two weeks, the default option product is automatically purchased.

Even without separate management instructions, funds are automatically managed with pre-designated products. It is necessary to regularly check management performance and see if there is a need to change the default option. This system was created to prevent pension assets from being neglected without proper management, but it is also useful for retirement pension subscribers who have difficulty selecting appropriate management methods or financial products.

④ Seek more proactive management methods = One common misunderstanding revealed in Samsung Securities’ default option customer survey was that some respondents thought that once the default option is set, it is impossible to change to desired products. Since the default option only operates when pension assets are neglected, subscribers can switch to any desired product at any time. In a sense, actively managing according to individual circumstances and judgments without relying solely on the default option is essential.

If you have instructed to manage only part of matured funds with desired products, the default option applies only to the remaining balance. Subscribers can also choose not to manage funds through the default option and keep them as cash assets. In this case, you must notify the retirement pension service provider of your intention via mobile app or other means. Also, funds managed under the default option can be switched to other products at any time, which is called 'opt-out.' If you want to invest in products other than the default option, simply sell the default option products and buy the desired products without any separate declaration of intent. ? Kwon Yong-su, Head of Retirement Research Institute, Samsung Securities