TDFs Become the Game Changer for Retirement Pensions: A New Perspective on the 30% Safe Asset Segment

70% Risky Asset Limit Spurs Rise of High-Vintage TDFs as an Alternative

There is analysis suggesting that the performance of retirement pensions depends more on when you start and how you manage the allocation of restricted assets, rather than simply on the amount of contributions. In the current system, how to fill the de facto fixed "30% safe asset segment" has emerged as a key variable for long-term returns.

Under the current retirement pension system, the investment limit for risky assets, including equity funds, is capped at 70%. Although there are calls for regulatory easing, this rule remains in place to prioritize the stability of retirement assets. As a result, many participants tend to allocate 70% of their funds to equity products, with the remaining 30% distributed to safe assets such as bonds or deposits.

Retirement pension experts advise that the longer the investment horizon until retirement, the more important it is to use the "30% safe asset" segment strategically to enhance returns, rather than treating it as a simple defensive allocation.

Kim Hyena, Head of Pension Marketing at Kiwoom Asset Management, said, "People in their 20s and 30s should use pensions as an active long-term investment portfolio, not just as a tax-saving tool." She emphasized, "The success of pension investments for younger generations depends on how much, and for how long, they maintain their equity allocation. Therefore, it is necessary to utilize the restricted 30% safe asset segment more strategically through high-vintage qualified target date funds (TDFs)."

The greatest advantage for investors in their 20s and 30s is time. With decades remaining until retirement, young investors can stay exposed to rising markets for extended periods and have ample time to recover from interim losses through multiple market cycles. Regardless of whether the investment style is aggressive or conservative, experts consistently agree that long-term performance is determined by how much and for how long one is exposed to equities.

Recently, demand for bond-mixed products in the retirement pension market has been growing rapidly. According to the Korea Exchange, as of June last year, the net assets of domestic listed bond-mixed ETFs had increased about sevenfold compared to the end of 2022. This surge is due to demand from investors seeking to secure even a slightly higher equity allocation without exceeding the 70% risky asset limit.

However, bond-mixed ETFs also have clear limitations. The equity portion of these products is typically around 20%, with a regulatory maximum of less than 50%. Even if the entire 30% safe asset segment is filled with bond-mixed ETFs, the additional equity allocation in the overall portfolio is limited to a maximum of about 15%. In other words, even if the entire 70% risky asset segment is filled with equities, the total equity allocation cannot easily exceed 85%.

This is why TDFs have recently been gaining attention in the pension market. Unlike general bond products, TDFs can have an equity allocation of up to 80%. If the 30% safe asset segment is composed of high-vintage qualified TDFs with a long time remaining until retirement, an additional equity allocation of about 24% can be secured just within this segment.

TDFs are products that automatically adjust asset allocations targeting a specific retirement date, and "qualified TDFs" recognized by financial authorities are classified as non-risky assets in retirement pension accounts. When TDFs are used effectively, it is possible to maintain an overall portfolio equity allocation of up to 94%.

Differences are also appearing in terms of performance. Among currently available qualified TDFs, the highest-vintage product, Kiwoom Asset Management's "Kiwoom Dream TDF 2065," is designed to maintain a high equity allocation for people in their 20s and 30s with more than 40 years until retirement. This product recorded a return of over 10% in the first three months after launch, while the average return for bond-mixed ETFs during the same period was in the 6% range. Considering the compounding effect over the long term, the gap at retirement could widen even further.

Some are concerned about the side effects of maximizing equity allocations. However, the industry explains that products like high-vintage TDFs, which are systematically designed for diversification and asset allocation, can mitigate much of these risks. This is because they combine global diversification by country and region, style allocation across value, growth, and quality, ultra-diversification by theme and sector such as technology, biotech, and AI, and automatic allocation adjustments by experts based on market conditions and life cycle.

Ultimately, the key to retirement pension success lies in how early you start and how smartly you manage the safe asset segment within the system's limitations. Even with the same 70:30 structure, the outcome of your retirement assets can vary dramatically depending on your choices.