[Financial Planning for the 100-Year Life] How to Succeed in Managing Retirement Pension Assets

Sleeping retirement pensions are waking up. According to the "2024 Retirement Pension Investment White Paper" released by the Ministry of Employment and Labor and the Financial Supervisory Service on June 9, the total accumulated retirement pension funds reached 432 trillion won at the end of last year, nearly doubling over the past five years. If this growth trend continues, the total is expected to surpass 500 trillion won by the end of this year, which marks the 20th anniversary of the introduction of the retirement pension system, or by early next year. Notably, the share of DC (Defined Contribution) plans, managed by the participants themselves, and IRP (Individual Retirement Pension) plans has surpassed that of DB (Defined Benefit) plans, which are managed by employers. Last year, DB plan assets grew by only 4%, while DC plans grew by 17% and IRPs by 31%.

Most newly adopting companies are choosing DC plans, and existing DB plan companies are also transitioning to DC plans. More employees are additionally contributing to IRPs to supplement insufficient pensions or depositing their severance pay into IRPs. If this trend continues, the retirement pension market will gradually become centered on DC and IRP plans. For reference, DC and IRP plans account for about 65% of the retirement pension market in the United States.

Another notable point is how DC and IRP plans are being managed. Employees are increasing their allocation to performance-based investment products, which carry the risk of principal loss but offer the potential for higher returns. As of the end of last year, the share of investment products in DC plans rose by 5 percentage points year-on-year to 23%, while IRPs rose by 6 percentage points to 34%. Although this is lower than the 80% in the US and 55% in Japan, it is encouraging that the proportion, which had long remained at 10-20%, has now increased to the 20-30% range. Last year, the average return for principal-guaranteed products was 4%, while investment products achieved 10%. This is proof that in today’s low-interest-rate environment, increasing the allocation to investment products is necessary for better performance. However, if employees increase their exposure to investment products without sufficient preparation and suffer principal losses, the consequences could be even worse. What efforts should employees make as they increase their allocation to investment products?

The most urgent task is to develop a stronger sense of ownership over their retirement pensions. In the United States, employees are well aware that managing their DC retirement pensions effectively is key to joining the middle class and preparing for retirement. They apply the investment knowledge gained from managing their retirement pensions to other asset management activities. Many employees aspire to become "retirement pension millionaires" (those with retirement pension assets exceeding $1 million). According to the largest US asset manager, Fidelity, as of the end of March, there were 861,000 customers with retirement pension assets of $1 million or more. Nationwide, this figure is estimated at around 4.31 million.

In contrast, in Korea, many employees neglect the management of their valuable retirement pensions and instead focus on short-term financial strategies. According to the Capital Market Research Institute, the annual stock trading turnover rate for male investors in their 20s reaches 6,800%. If someone buys and sells stocks 68 times a year, when do they have time to work? Salaries, bonuses, and severance pay all come from work. For employees, work is their most important financial asset. Rather than focusing on short-term financial strategies, it is necessary to concentrate on managing retirement pensions and applying the investment knowledge gained there to other areas.

The next step is to properly understand and practice long-term and diversified investment. To succeed in managing investment products, both market risk and individual product risk must be managed effectively. Market-wide downturn risks should be addressed through long-term investing, while individual product risks should be managed by selecting high-quality products and diversifying investments. DC and IRP plans are the most suitable funds for practicing long-term and diversified investment principles, as they allow for long-term, regular investments in fund-based products over 10, 20, or 30 years.

It is crucial to select quality investment products with the help of financial institutions that have well-established investment product advisory systems. As shown in this white paper, investment returns are heavily influenced by the quality of financial advice. It is even more important to maintain a long-term, diversified investment approach without being swayed by short-term market fluctuations. I hope that, through these efforts, more employees will aspire to become retirement pension millionaires.

Kang Changhee, Head of the Happy 100-Year Asset Management Research Association