[Chodong Perspective] Three Years After Introduction, the Default Option Is Default in Name Only

Average Return of Retirement Pensions Remains in the 2% Range Over the Past Decade
Default Option Introduced to Improve Returns
Effectiveness Questioned Due to Heavy Preference for Principal-Guaranteed Products
System Needs Reform to Ensure Default Option Functions Properly

With the inauguration of the new administration, discussions are underway regarding measures such as the fund-type management of retirement pensions in order to improve their low returns. Retirement pensions, which are supposed to secure the public’s post-retirement life, have been criticized for failing to fulfill their function due to consistently low yields.

The average return of retirement pensions over the past 10 years is only 2.31%. Even the 5-year average return is just 2.86%, which is significantly lower than the National Pension Service’s average return of 8.17%.

The government has implemented various measures to raise the low returns of retirement pensions, but these efforts have not produced the expected results. A representative example is the retirement pension default option (pre-designated management system). The law was enacted in July 2022 and fully implemented from July 2023. The default option is a system where, if a retirement pension participant does not provide specific investment instructions, the pension is automatically invested in pre-designated financial products after a certain period. The purpose was to increase returns by managing idle pension assets through pre-set products.

However, three years after its introduction, the default option system has been criticized as being ineffective. Although it is supposed to be automatic, in practice, participants must directly select the product. Another reason for the low returns is that principal-guaranteed products are included in the default options. Among countries with a default option system, only Korea and Japan include principal-guaranteed products. In contrast, countries such as the United States, the United Kingdom, and Australia, which focus on performance-based products, have significantly higher returns. For example, the average annual return of the United States’ representative retirement pension ‘401K’ and Australia’s ‘MySuper’ default option reaches 7%.

Most participants who find it difficult to make investment decisions inevitably choose the safe principal-guaranteed products. According to the Ministry of Employment and Labor and the Financial Supervisory Service, as of the end of last year, the accumulated amount in retirement pension default options was 40.067 trillion won, of which 35.3386 trillion won, or 88%, was concentrated in ultra-low-risk principal-guaranteed products. Although the purpose of introducing the default option was to improve retirement pension returns, most participants chose principal-guaranteed products, undermining this goal. Last year, the returns by product risk level were 16.8% for high-risk products, 11.8% for medium-risk products, 7.2% for low-risk products, and only 3.3% for ultra-low-risk products. This means that 88% of default option participants earned returns in the 3% range.

Given this situation, there is a growing call to urgently improve the default option system. An official from a securities company stated, "It is necessary to refer to Australia’s retirement pension case. If a participant does not select a product within a certain period, the financial institution automatically allocates the funds to a non-principal-guaranteed product, and even if a loss occurs, there are provisions that prevent holding the financial institution legally liable. Thanks to this, the default option operates effectively and contributes to higher long-term returns."

Above all, efforts are needed to help participants understand what the default option actually is. Even three years after its introduction, many participants still find the term itself unfamiliar. Without knowledge of the default option, when participants receive messages from financial institutions regarding its setup, most naturally opt for principal-guaranteed products.

Retirement pensions must be improved to ensure a stable post-retirement life for the public. The government should actively create an environment through institutional reform that enables retirement pension participants to manage their assets efficiently.