[Practical Finance] If You Worry About Life After Retirement, Focus on TDF

Diversified Investments in Bonds, Stocks, and Alternative Assets
Automatically Adjust Asset Allocation According to Retirement Cycle

With the stock market sluggish, prolonged high interest rates, and the temporary ban on short selling increasing market volatility, stock investment has become challenging. Although there are concerns that the National Pension may be depleted, making post-retirement livelihood uncertain, it is not easy to study individual products and set investment directions amid a busy daily life. Accordingly, 'Target Date Funds' (TDFs), which appropriately diversify the proportions of risky assets such as stocks and safe assets such as bonds according to the retirement timeline, are gaining attention.

According to financial information provider FnGuide on the 15th, as of last month, the domestic TDF assets under management amounted to 8.496 trillion KRW. This is about 315.5 billion KRW more than the 8.1805 trillion KRW at the end of last year. In Korea, TDFs began to attract market attention in earnest in 2016, and with the launch of products by major asset management companies, the related market has grown rapidly every year. The market size, which was around 70 billion KRW in 2016, grew to 3 trillion KRW by 2020 and surpassed 8 trillion KRW last year.

The demand for TDFs is expected to increase further due to the implementation of the default option system for retirement pensions (pre-designated management system) in July. The default option is a system where defined contribution (DC) retirement pension or individual retirement pension (IRP) subscribers who do not give specific management instructions have their funds managed through pre-designated products. The significant expansion of the TDF market in advanced countries such as the United States was also greatly influenced by the default option.

TDFs invest in a diversified portfolio of domestic and international bonds, stocks, and alternative assets, automatically adjusting asset allocation according to the retirement lifecycle. According to Statistics Korea's 'Income Lifecycle of Koreans,' on average, there is a deficit after birth, a surplus starting at age 27 when labor income begins, and a return to deficit from age 61, the retirement age. TDFs reduce the proportion of risky assets and increase safe assets as the retirement age approaches. Subscribers need to consider their retirement date to select the appropriate TDF. The number attached to a TDF product, called the 'vintage,' indicates the target retirement date. For example, if an employee born in 1990 plans to retire at 55, the retirement year is 2045, so they would choose TDF2045. Currently, TDF2060 has been launched domestically.

In the recent volatile market environment, TDF products have recorded excellent returns through stable asset allocation strategies. Mirae Asset Global Investments, which holds the largest market share in the domestic TDF market, reported that its Mirae Asset Strategic Allocation TDF (with total assets under management of 3.8028 trillion KRW) achieved returns of 5.13% and 10.16% over the past 1 and 3 years, respectively. Among these, the 2050 vintage recorded the highest return of 12.57% during the same period. Korea Investment Management's Korea Investment TDF ETF Focus marked a total return of 9.74% last month, celebrating its first anniversary since launch. This product focuses on US growth stocks with currency exposure and domestic bonds. By incorporating relatively low-cost investment vehicles such as exchange-traded funds (ETFs), it maximizes long-term returns.

Hanwha Asset Management's Hanwha LifePlus TDF, which collaborates with global investment bank (IB) JP Morgan in TDF management, posted a 9.75% return over the past year. Unlike other asset managers that use their own glide path (lifecycle asset allocation curve), Hanwha uses an asset allocation program jointly developed with JP Morgan. Jeffrey Wang, a JP Morgan investment specialist, said, "The '60-40 portfolio,' which invests 60% in stocks and 40% in bonds, is expected to yield an annual return of 7% next year," adding, "97% growth is anticipated over the next 10 years." This figure exceeds the expected 33% return from holding only cash assuming a 2.9% interest rate over 10 years.

Investing in TDFs within pension savings accounts or IRP accounts also offers tax credit benefits. Subscribers with an annual total salary of 55 million KRW (comprehensive income of 45 million KRW) or less receive a 16.5% tax credit rate. Those with higher incomes receive a 13.2% rate. Starting this year, the tax credit limit for pension savings has increased from 4 million KRW to 6 million KRW, and for IRP from 7 million KRW to 9 million KRW. A representative from an asset management company said, "Generally, fees may be slightly lower when subscribing through pension savings rather than retirement pensions," adding, "TDFs are advantageous pension account products for busy workers who have little time to invest directly, and it is advisable to invest a fixed amount monthly if the money is not needed immediately."