Default Option in Retirement Pension Has Very Low Returns... "Concentrated Only in Ultra-Low Risk Group" [AK Radio]

Only 29 Trillion Concentrated in Ultra-Low Risk Products
High-Risk Product Subscriptions Limited to 480 Billion

The default option system for retirement pensions, which was implemented on July 11 last year, has marked its first anniversary. The default option is a system where, if defined contribution (DC) retirement pension and individual retirement pension (IRP) subscribers do not instruct how to manage their accumulated funds, the retirement pension providers automatically manage the funds according to a pre-agreed method. This system was introduced to address the issue of accumulated funds being concentrated in ultra-low-risk products due to subscribers' indifference or lack of financial knowledge, which leads to lower returns.

One year after implementation, a total of 305 products from 41 retirement pension providers are currently being sold and operated. According to the retirement pension default option disclosure, the accumulated funds amount to 32.0995 trillion KRW, with 5.651 million designated subscribers. However, contrary to expectations, about 90% of subscribers are concentrated in ultra-low-risk grade products that guarantee principal and interest 100%, raising concerns that the original purpose of improving retirement pension returns is not being fulfilled.

The default option is classified into four levels: ultra-low risk, low risk, medium risk, and high risk. Performance-based products with the possibility of principal loss can be included starting from the low-risk level. However, only about one in ten subscribers are willing to take even a slight risk.

The scale of accumulated funds has increased more than 2.6 times from 12.552 trillion KRW in the fourth quarter of last year to the first half of this year. By system, DC and IRP have accumulated 23.4985 trillion KRW and 9.0411 trillion KRW respectively. By risk grade, 29.3478 trillion KRW is concentrated in ultra-low-risk products, while low-risk and medium-risk products have 1.8772 trillion KRW and 1.0211 trillion KRW respectively, and high-risk products account for only 483.4 billion KRW.

This phenomenon contrasts with the U.S. retirement pension system, 401(k). In the U.S., 42% of pension assets are invested in equity funds, and 31% in target-date funds (TDF), with an average annual return of 8.4% over the past decade. In 401(k), the default option is basically selected as an investment-type product, actively managing retirement pensions.

There is also a significant disparity among domestic industries. While bank default option accumulated funds exceed 27 trillion KRW, the securities industry stands at about 1 trillion KRW. Among securities firms, Mirae Asset Securities had the largest accumulated funds at 350 billion KRW, followed by Korea Investment & Securities and Samsung Securities.

Experts emphasize the importance of subscriber education to resolve these issues. The Korea Capital Market Institute pointed out that if subscriber education can induce rational interest in management instructions, negative factors affecting returns such as allowing principal-guaranteed products or convenience in selection due to representative products can naturally be resolved.

Additionally, the necessity of introducing a fund-type retirement pension system is being raised. The fund-type retirement pension is a system where the management institution operates the total accumulated amount of all subscribers collectively as a fund, rather than individual subscribers, offering advantages of both stability and higher average returns.

Furthermore, there are opinions that principal-guaranteed products should be excluded from the default option. It is argued that most advanced retirement pension countries such as the U.S., the U.K., and Australia configure default options solely with performance-based products. However, this would require amendments to the Employee Retirement Benefit Security Act, and opposition from banks is expected, making realization challenging.

Currently, government departments including the Ministry of Employment and Labor and the Ministry of Economy and Finance are reviewing ways to improve the returns of the default option. Experts advise that investors need to actively study for their retirement and that efforts to improve awareness by the government and authorities are necessary. It is also important to develop a habit of regularly checking key information such as returns and accumulated funds of retirement pension products provided by the Financial Supervisory Service.

For the retirement pension default option system to operate according to its intended purpose, institutional improvements and changes in investor awareness are needed. Going forward, efforts should continue to improve the system by referring to advanced countries like the U.S. and to provide better products to investors.

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