South Korea’s defined contribution (DC) retirement plan market has grown rapidly in recent years. At the end of 2022, DC assets totaled 82 trillion Korean won (about 63 billion U.S. dollars), but almost 80% of these assets were invested in short-term principal and interest guaranteed products or cash equivalents. This conservative investment profile is seen as largely a result of members not being actively engaged in directing the investment of their DC assets.
To counter the passive investment propensity of South Korea’s DC plan members, in 2022 the government introduced a requirement that DC plan sponsors establish, by July 11, 2023, one or more pre-designated investment fund options (also referred to as default fund options) within the plan. Members will be required to select one of these in advance, and their plan investments will be directed to their pre-designated default investment option in the event they fail to provide investment direction (e.g., upon joining the plan, or upon the maturity of a fixed-term investment product). See our February 2022 Global News Brief: South Korea: New investment option rules for DC retirement plans.
There are several compliance actions for DC plan sponsors to complete by the deadline:
There are 40 registered DC pension providers, but the top 15 of these manage 90% of all DC assets. With approximately 300,000 DC plan sponsors and 3.5 million DC plan members, some very rough math yields that each of the 15 main providers has, on average, on the order of 20,000 corporate clients and 200,000 DC individual member clients. There may be great consulting demand placed on the providers by sponsors and plan members in the short time remaining before the deadline. In addition, the MOEL, whose approval of the updated pension plan documents is required, will likely be overburdened. DC plan sponsors that haven’t done so already should act immediately to implement the new default option system and minimize non-compliance risk.