[Financial Microscope] Which Retirement Pension Product Suits Me?

All DB, DC, and IRP Plans Have Pros and Cons
For DC and IRP Plans Managed Directly,
Compare Principal-Guaranteed and Non-Guaranteed Products Based on Your Investment Preferences
If Managing Is Cumbersome, Consider the Default Option
Physical Transfers to Other Financial Institutions Are Possible
However, Transfers Are Only Allowed Between the Same Plan Types
Note That Some Products Cannot Be Transferred

Retirement pensions, which we subscribe to in order to secure our income after retirement, have recently gained attention with the introduction of the retirement pension physical transfer system that allows switching to the desired bank, securities, or insurance company. Since you can freely move between financial companies, there are many factors to consider. To subscribe to a retirement pension product, you need to know the investment type that suits you and consider the rate of return and principal guarantee on your own. If this is difficult, you can use the pre-designated management system (default option) that automatically manages the accumulated funds according to a pre-set management method. Below is a Q&A format summary related to retirement pensions.

Q. What types of retirement pensions are there?

A. There are Defined Benefit (DB) plans, Defined Contribution (DC) plans, and Individual Retirement Pensions (IRP). DB and DC plans are funds entrusted by companies to financial institutions to pay retirement benefits. If an employee is enrolled in a retirement pension at their company, it is one of these two. IRP is a retirement pension that individuals must subscribe to and manage on their own. Even if you are enrolled in DB or DC plans, you can also subscribe to an IRP.

Q. What are the differences between DB and DC plans, which are managed with company money?

A. In a DB plan, the company manages the retirement benefits. The company decides which products to subscribe to, so regardless of management performance, the employee receives a predetermined retirement benefit. In a DC plan, the company deposits at least one-twelfth of the annual salary into a financial institution each year, and the employee manages the funds directly. The amount received after retirement varies depending on investment returns. However, the company must operate both DB and DC plans for employees to choose between the two.

Q. Who is suitable for DB and DC plans respectively?

A. Both are similar in that no additional personal money is required. However, DB plans suit employees with steadily increasing salaries, while DC plans suit employees who want to earn higher returns. DB plans calculate retirement benefits by multiplying the average salary of the last three months before retirement by the years of service. In other words, the higher the salary just before retirement, the higher the retirement benefit. Employees with steadily rising salaries can receive more retirement benefits by choosing DB plans.

In DC plans, the company deposits money into the retirement pension account, and the employee must manage it to generate investment returns. If you can generate returns, you may receive more retirement benefits than with DB plans. However, if you invest in products that do not guarantee the principal and lose the principal, you may receive less retirement benefits than with DB plans.

Q. DC and IRP plans are similar in that the individual manages the funds directly, but what are the differences?

A. The biggest difference is that DC plans are subscribed to by the company and managed by the employee with company-provided funds, whereas IRP plans are subscribed to and funded by individuals themselves. Unlike DC plans, IRP plans offer tax deduction benefits. Including the pension savings tax deduction limit of 6 million KRW, up to 9 million KRW can be deducted. The deduction rate is 16.5% for comprehensive income tax bases under 45 million KRW and 13.2% for amounts exceeding that. Another advantage is that funds can continue to be managed after retirement. DC plans require lump-sum withdrawal upon retirement, but if enrolled in an IRP, the funds can be transferred to the IRP account.

Q. What financial products can be managed under DC and IRP plans?

A. They are divided into principal and interest-guaranteed products and non-guaranteed products. Guaranteed products include equity-linked bonds (ELB), guaranteed interest insurance (GIC), and deposits. Non-guaranteed products include funds, bonds, exchange-traded notes (ETN), and exchange-traded funds (ETF).

Q. If I chose DC or IRP but find it bothersome to research each product individually, is there another way?

A. You can use the retirement pension pre-designated management system (default option). If you have enrolled in DC or IRP but have not decided which financial products to manage your retirement pension funds with, this system automatically manages the funds according to a pre-set management method. This does not apply to DB plans. Financial companies create products approved by the government based on portfolios. They are subdivided into ultra-low risk products that guarantee principal and interest, low risk, medium risk, and high risk products. You can review and subscribe to products from your preferred financial company (bank, insurance, securities). According to the top 5 products by risk rating in the fourth quarter of last year, insurance and securities company products showed better returns over six months.

Q. I heard that with DC or IRP plans, it is possible to move to another financial company besides the one currently subscribed to. Is that true?

A. Yes, through the retirement pension physical transfer (switching) service. You can open a retirement pension account with the new retirement pension provider (bank, insurance, securities) and submit a transfer application. Currently, transfers are only possible within the same system. For example, you can only transfer from one IRP to another IRP. DC and IRP plans allow only full transfer of accumulated funds. If physical transfer within the contract is not possible, the funds must be liquidated and transferred. Products eligible for physical transfer include deposits, ELB, funds, and ETFs. REITs, money market funds (MMF), and equity-linked securities (ELS) are not eligible.