[Deep & Wide] Retirement pension loss worse than’indifferent, irresponsible’ deposit

Omo, 35, an office worker who signed up for a DC product in 2018, was cheated after checking the rate of return. The annual conversion rate of retirement pension was only 1.34%. More than half of the investment was invested in a three-month term deposit product with an annual interest rate of 0.9%, but this is because it was completely forgotten. Mr. Oh said, “Even if I try to change the investment destination, it is difficult to know which product to invest in.”

Overview of retirement pension default options. Graphic = Kim Eun-kyo [email protected]

The introduction of the’default option’ (pre-designated management) is being re-implemented by the National Assembly to increase the return on retirement pensions left uninterested by investors. Rep. Kim Byung-wook, a secretary of the Democratic Party along with the National Assembly’s Political Affairs Committee, announced on the 2nd that he proposed an amendment to the Workers’ Retirement Benefit Guarantee Act with the main idea of ​​introducing default options. The bill was also initiated during the 20th National Assembly, but was scrapped due to the expiration of the term.

The retirement pension is divided into two types. The retirement benefit (DB) type, which is determined according to the average wage at the time of retirement and the number of years of service, is the DC type, and the amount of pension receipt varies depending on the operating income. Therefore, the ROI is particularly important for the DC type.

Defined contribution (DC) retirement pension rate of return. Graphic = Kim Eun-kyo [email protected]

When the default option is introduced, the financial company will automatically roll out the assets according to the subscriber’s investment tendency, even if the DC-type retirement pension subscriber does not give a separate management instruction. As of last year, the accumulated amount of DC retirement pension was 67.2 trillion won. Rep. Kim Byung-wook said, “By introducing the default option for retirement pensions in the US, we have become a stable means of retirement.

As of 2020, the return on investment in DC-type retirement pensions was 3.47%, higher than in 2019 (2.83%). However, when looking at each product, the story is different. The principal and interest guaranteed type, which accounts for 83% (56 trillion won) of the DC type retirement pension, is only 1.69%. It fell rather than in 2019 (1.94%). On the other hand, the yield of the dividend type invested in stocks was 13.24%, up 5 percentage points from 2019 (7.63%). This is due to the boom in the stock market, with an annual increase rate of 30.75% last year.

Current status of defined contribution (DC) retirement pensions. Graphic = Kim Eun-kyo [email protected]

The ruling party and the government’s pursuit of introducing default options is linked to this situation. Many of the retirement pension subscribers choose the principal and interest guarantee type when signing up to avoid loss of principal. Since then, investment products are not changed due to lack of knowledge and hassle on financial products. According to the Financial Supervisory Service, as of 2017, 91% of subscribers did not give separate management instructions. In fact, it is neglecting.

In high interest rates, the principle and interest guarantee type is not a bad option. However, in the era of ultra-low interest rates, the situation has changed. As of the end of last year, the average interest rate for regular deposits of commercial banks was 0.9%. In low interest rates, you need to invest in a variety of asset classes to increase your return. The annual average cumulative return of the national pension, which is invested in a variety of domestic and foreign stocks and bonds, is 5.93%. “The real risk factor when managing pension assets is not short-term losses, but long-term yield declines,” said Nam Jae-woo, head of the Fund and Pension Division of the Capital Market Research Institute. It is difficult to obtain a rate of return above the inflation rate.”

The New Deal Fund, recently promoted by the government and the ruling party, is also focusing on introducing default options. This is because the way to invest in the retirement pension, which is tied to bank deposits and savings, into the New Deal Fund. Choi Hyun-man, vice chairman of the Financial Investment Association, said at the’New Deal Fund policy meeting’ in August last year, “If you connect to the (New Deal) infrastructure fund and manage your retirement pension, the rate of return will improve steadily.”

The default option is to provide cardiopulmonary resuscitation on a retirement pension that has been neglected by the investor’s indifference. But there is a problem. There is a possibility of principal loss. In 2018, the principal and interest-guaranteed type made a profit of 1.72% (based on DC type), while the dividend type product invested in the stock market lost -5.5%.

Accordingly, a target date fund (TDF) is considered as a way to supplement stability. It is a product managed by the manager by adjusting the proportion of assets such as stocks, bonds, and raw materials according to the expected retirement period of investors. As of 2018, the proportion of investment in TDF products among DC-type retirement pensions in the United States was 24%. On the other hand, as of 2019, only 1.2% (736.5 billion won) of DC-type retirement pensions are invested in TDF products. Kwon Tae-wan, manager of Mirae Asset Pension Marketing, said, “It is not easy for individuals to judge the market situation and reallocate assets.”

Overseas, the company has introduced a default option for retirement pensions, generating 5-7% annual profits. The US 401K retirement pension is the default option and has an annual return of 7%, while Australia’s My Super default option has an average annual return of 6.8%. Kim Byeong-deok, a senior research fellow at the Korea Financial Research Institute, said, “In the US and Australia, after the default option was introduced, the retirement pension shows stable returns.” It is necessary to increase the rate of return.”

Reporter Ahn Hyo-seong [email protected]