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Asset Allocation-Focused Retirement Pension Funds: TDFs and TRFs
Publication date Aug. 06, 2024
Summary
The fundamental mechanism for revitalizing the retirement pension scheme is the enhancement of investment performance. While policy measures such as offering tax incentives or imposing legal mandates can address some issues, such as system integration or restrictions on early withdrawals, they often have limited effectiveness and may introduce unintended consequences. Ultimately, the primary concern is achieving high returns. In asset management, the key to improving returns lies in asset allocation. An optimal solution involves building a globally diversified investment portfolio through rational asset allocation strategies. However, individual efforts and capabilities alone are not sufficient to attain this objective. For this reason, pension asset management typically relies on indirect investment rather than direct investment led by individuals. It is the core mission and role of the asset management industry to provide efficient indirect investment solutions that incorporate asset allocation strategies. Therefore, it is imperative to restructure the retirement pension market to prioritize asset allocation funds in the form of publicly offered funds.
Asset allocation funds can play a critical role in the default option scheme, as default options delegate all asset management decisions, including asset allocation, to external professionals. In overseas cases, Target Date Funds (TDFs) and Target Risk Funds (TRFs) are the principal asset allocation funds utilized during the plan asset contribution phase. In Korea, however, the default option market has become predominantly TDF-oriented due to the underdeveloped TRF market. It should be noted that TDF-based asset allocation funds may not be suitable for Korea’s default option scheme that has been designed as a pre-designated investment system. In response to this, the Korea Financial Investment Association has recently worked on introducing the “Didim Fund”—a common brand for asset allocation funds specifically tailored for retirement plans. This introduction aims to leverage the successful performance of asset allocation funds to bring about revolutionary changes in Korea’s retirement pension scheme.
Asset allocation funds can play a critical role in the default option scheme, as default options delegate all asset management decisions, including asset allocation, to external professionals. In overseas cases, Target Date Funds (TDFs) and Target Risk Funds (TRFs) are the principal asset allocation funds utilized during the plan asset contribution phase. In Korea, however, the default option market has become predominantly TDF-oriented due to the underdeveloped TRF market. It should be noted that TDF-based asset allocation funds may not be suitable for Korea’s default option scheme that has been designed as a pre-designated investment system. In response to this, the Korea Financial Investment Association has recently worked on introducing the “Didim Fund”—a common brand for asset allocation funds specifically tailored for retirement plans. This introduction aims to leverage the successful performance of asset allocation funds to bring about revolutionary changes in Korea’s retirement pension scheme.
Introduction
With the prospect of living up to 100 years becoming increasingly likely, the duration of retirement—characterized by a lack of income and ongoing consumption—may extend beyond the working years. Ensuring that a 100-year lifespan is a blessing rather than a disaster depends crucially on pension assets. In this respect, securing lifelong income after retirement necessitates a multi-layered pension scheme. Building on the first layer provided by the National Pension Scheme, Korea’s retirement pension scheme, introduced in 2015, will mark its 20th anniversary next year. As of the end of 2023, retirement plan assets have rapidly accumulated to KRW 382 trillion, and are projected to surpass KRW 400 trillion. Alongside the National Pension Fund (NPF), which has already exceeded the KRW 1,000 trillion mark, the retirement pension scheme has become a crucial component of private pension provision for ensuring nationwide retirement income security.
Out of KRW 1,000 trillion in assets held by the NPF, KRW 640 trillion has been generated from investment returns. Notably, the NPF has achieved an average annual return of 7.2% over the past five years, generating KRW 284 trillion in profits, which has significantly contributed to the accrual of pension assets. This long-term performance is particularly noteworthy, given that the five-year period includes 2022, the year marked by substantial valuation losses due to a downturn in the global asset management market. In contrast, retirement plans have reported an average annual return of 1.5% over the same period. Given the size of retirement plan assets, the cumulative profits from plan asset management are estimated to be less than KRW 23 trillion. The compounding effect resulting from these varying returns is particularly pronounced in the management of plan assets, which are typically invested over long periods. For example, if an employee contributes KRW 300,000 monthly over a 30-year period, they would receive KRW 360 million upon retirement under the NPF. However, with the average return of retirement plans, the accumulated amount would only be KRW 140 million. When converted into a lifetime annuity, the NPF would provide a monthly payment of KRW 1.5 million, whereas the payment from retirement plans would only amount to KRW 600,000 per month. This discrepancy represents a point where plan members annuitize their retirement benefits or opt for a lump sum payment.
In the ongoing public pension reform process, various institutional reform measures are being discussed to revitalize the retirement pension scheme, including enhanced incentives through tax benefits and legal requirements. However, the most fundamental and effective solution for boosting the scheme lies in improving investment performance. Many of the current challenges—such as streamlining the scheme, imposing restrictions on early termination and withdrawals, and mandating annuity payments—can be addressed or alleviated by increasing the returns on plan assets. This is evidenced by the voluntary and proactive participation of employees in effective pension plans, such as the US 401(k) and Australia’s Superannuation.
The key to improving performance lies in asset allocation, which has been robustly validated through both academic research and empirical evidence. It means that the restructuring of the asset management system for increasing returns should be geared toward efficient asset allocation. Building a globally diversified investment portfolio could be the beginning and end of revitalizing the retirement pension scheme. However, in practice, this objective is hard to achieve solely through individual efforts and capabilities. As demonstrated by overseas cases, the management of plan assets generally relies on indirect investment managed by external professionals rather than direct investment. Consequently, indirect investment instruments provided by external financial institutions must incorporate efficient asset allocation strategies, given that asset allocation is both the most critical and the most complex decision in plan asset management. This is why pension products offered by retirement plan providers should be centered around asset allocation funds.
Asset mix for retirement plans
The low returns on retirement plan assets are often attributed to an excessive focus on principal-protected products. Thus, a crucial step towards improving returns is to increase the weight of participating products within the overall asset composition. To this end, various policy initiatives have been adopted, such as requiring the establishment of investment committees and the preparation of the Investment Policy Statement (IPS) for Defined Benefit (DB) plans, as well as introducing the default option scheme for Defined Contribution (DC) plans. However, despite these efforts, the intended policy objectives have not been fully achieved due to various institutional constraints, which remains a challenge for Korea’s retirement pension scheme. There is also skepticism about whether simply increasing the proportion of participating plans will improve long-term returns. This skepticism arises from the fact that the returns on participating plans have not adequately delivered the corresponding risk premiums. The existing participating products, predominantly composed of traditional assets centered around bonds, exhibit an extremely conservative risk appetite. Furthermore, these products often fail to build an optimal portfolio free from idiosyncratic risk, leaving them vulnerable to the volatility of individual capital markets.
As of the end of 2023, retirement plan assets amount to KRW 382.4 trillion. Of this amount, 87.2% is allocated to principal-protected products, while participating products make up 12.8% or KRW 49.1 trillion.1) It is commonly recognized that principal-protected products are inherently safe assets and participating products are risky assets; however, this is not an appropriate classification. In terms of asset allocation by asset class, safe assets are represented by bonds, while risky assets include stocks and alternative investments. Therefore, it is reasonable to consider participating-type retirement plans as safe assets. Meanwhile, principal-protected products, which are currently classified as safe assets, should be viewed as deposits (cash) for temporarily holding funds, rather than as assets under management (AUM). However, it should be noted that statistics on asset composition from the asset allocation perspective—crucial information for managing plan assets—are not readily available.
The management status of retirement plans, periodically published by regulatory authorities, lacks asset allocation statistics by asset class, but only by product. According to the available statistics, 87.3% of the AUM for participating products, totaling KRW 42.8 trillion, are invested in collective investment securities (funds), including insurance products. These are further categorized into equity funds (KRW 14.5 trillion), mixed funds (KRW 7.1 trillion), bond-mixed funds (KRW 8.7 trillion), and bond funds (KRW 9 trillion).2) However, such product-level statistics make it challenging to accurately assess the risk-return profile of the total retirement plan assets. Information on asset allocation by typical asset class is required to construct a rational investment portfolio for plan assets. Recent discussions in global retirement pension markets focus on whether the traditional 60 to 40 ratio between stocks and bonds remains valid and how much the allocation to alternative investments should be increased. In contrast, Korea’s retirement pension market is still at a rudimentary stage regarding asset management. There is a lack of accurate understanding regarding the allocation of plan assets to stocks, which precludes such discussions within Korea.
According to the author’s estimates, the proportion of stocks in Korea’s retirement plan assets under management is less than 4.3%. In monetary terms, this translates to KRW 16.3 trillion or less out of a total of KRW 382 trillion being invested in stocks.3) For participating products, the stock-to-bond ratio is roughly estimated at 30 to 70, which substantially deviates from the traditional 60 to 40 ratio mentioned above. This suggests that even if the plan asset management structure, heavily concentrated in principal-protected products, shifts focus to participating products, it would be difficult to achieve a satisfactory level of returns. Retirement pension plans play a very minimal role in the supply and demand dynamics of Korea’s stock market. More than 60% of the total equity assets in retirement plans are allocated to foreign stocks, leaving domestic stocks to represent less than 1.6% of total plan assets, equating to KRW 7 trillion or less. Unlike the US 401(k) case, where the expansion of plan assets has driven the dramatic growth of the domestic mutual fund market, a similar outcome in Korea seems unlikely. From a social welfare perspective, DB plans have structural shortcomings, as they place the burden of asset management, including asset allocation, entirely on individuals. Given that Korea has adopted a mandatory pension scheme rather than a voluntary corporate pension scheme, it is the state’s duty and responsibility to provide efficient default options centered around asset allocation funds.
Asset allocation-focused retirement pension funds
As previously discussed, effective management of retirement plan assets hinges on asset allocation, particularly through a globally diversified portfolio. This involves combining various products across different asset classes and regions to construct an optimal individual portfolio, and continuously rebalancing the allocation to respond to capital market fluctuations. As for DC plans, it is extremely difficult for individual employees to perform these tasks successfully over a long-term period, such as 30 years or more. Consequently, plan asset management primarily relies on indirect investment strategies that leverage external expertise. In this context, Korea’s retirement pension scheme regulates or discourages direct investment in underlying assets, like stocks and bonds, while promoting the use of indirect investment instruments, such as funds.
Indirect investment involves entrusting external professionals with discretion to make investment decisions regarding asset management. This discretion can vary significantly in terms of scope and depth. For instance, when investing in equity funds, indirect investment means handing over the stock selection decisions to external professionals to build a portfolio designed to mitigate the idiosyncratic risk associated with individual companies. In DC plans, where direct investment in stocks is not allowed, indirect investment tools available for employees typically involve delegating stock selection decisions to experts. However, simply selecting the right fund product is not enough to ensure optimal performance. The overall performance of an individual employee’s portfolio largely depends on the allocation across various types of funds rather than on the specific fund selected. This is based on the principle that the long-term performance of asset management is primarily determined by Strategic Asset Allocation (SAA).
To enhance the returns of retirement plans through the effective use of indirect investment tools, it is crucial to entrust not just stock selection but also asset allocation decisions to experts. The most straightforward method for such entrustment involves discretionary mandates. Examples of discretionary mandates include Outsourced CIO (OCIO), which has been increasingly utilized in DB plans, and robo-advisors in DC plans. However, the primary means of indirect investment for retirement plan assets has been collective investment securities in the form of publicly offered funds, while discretionary mandates are not allowed.4) This underscores the need to further expand the availability of asset allocation-focused retirement pension funds in the form of publicly offered funds.
Asset allocation-focused retirement pension funds should fulfill the following two criteria. First, they should establish a globally diversified investment portfolio across different asset classes and regions. Rather than focusing on single asset types such as stocks or bonds, the portfolio should encompass all available traditional and alternative investment assets to optimize risk diversification across different markets. This is a prerequisite in the Korean context, where a tendency toward over-concentration in specific asset classes leads to repeated loss of investment confidence. Risk diversification helps mitigate return volatility by allocating assets across different countries and regions. Taken together, it is necessary to build a global portfolio that invests in a variety of assets from multiple countries. Second, a regular and continuous portfolio rebalancing strategy should be incorporated into these funds. Individual asset allocation funds target a specific risk-return profile, which necessitates systematic management to maintain this profile as market conditions evolve. For individual plan asset management to achieve its objectives through indirect investment, it is vital to offer a comprehensive asset allocation fund, which meets both criteria outlined previously as a single product. In addition, retirement plan assets contributed by the majority of DC plan members should be managed through such funds. This implies that eligible default options must be presented as asset allocation funds.
As observed in overseas cases, Target Date Funds (TDFs) and Target Risk Funds (TRFs) are representative asset allocation funds utilized for retirement plans. TDFs, a typical type of asset allocation fund, adjust the level of risk according to a predetermined glide path based on a globally diversified portfolio, with the aim of aligning investments with the retirement date. In advanced pension markets where default option schemes are well established, a majority of DC plan assets are managed through TDFs. In Korea’s default option scheme for retirement plans, which operates as a pre-designated investment system, eligible products are predominantly offered as portfolios composed of TDFs. Given that Korea’s pre-designated investment system is governed by the suitability rule based on individual risk appetites, it is both irrational and inefficient to present asset allocation funds solely as TDF combinations.5)
Given the structure of Korea’s pre-designated investment scheme, the asset allocation fund suitable for eligible default option products is the TFR type. TRFs are asset allocation funds that are designed as a single product, combining various assets and incorporating continuous rebalancing to target a specific level of risk.6) They offer a diversified investment portfolio while aligning with risk preferences based on the suitability rule. However, there are currently only a few TRFs available among the eligible products in the pre-designated investment scheme. For a product to be approved as eligible for retirement plans, a proven track record in the market is required. Unfortunately, there are a limited number of TRFs in the publicly offered fund market, which meet such a requirement. In this regard, the immediate task of the asset management industry is to provide high-quality asset allocation funds with a proven track record.
Conclusion and implications
The Ministry of Employment and Labor oversees the retirement pension scheme, as retirement plans fall within the scope of labor and social welfare systems. The primary objective of the retirement pension scheme is to enhance employees’ entitlement to retirement income. This should not be viewed as a passive measure to protect employees’ entitlement from corporate bankruptcy. In a broader sense, it should be understood as a means to accumulate plan assets to ensure stable income security for employees in their post-retirement years. In the retirement pension scheme, finance serves as a means to achieve this objective. Consequently, it is the responsibility of asset managers, rather than retirement pension providers, to significantly increase plan assets. This means that increasing the returns on retirement plans is both a duty and a challenge for asset managers. The primary method for actively boosting returns is asset allocation, rather than stock selection. Therefore, competition among asset managers for the management of plan assets should focus on their asset allocation capabilities.
The Korea Financial Investment Association (KOFIA) has recently sought to introduce TRF-type asset allocation funds under the name “Didim Fund” into the pension market. The Didim Fund is defined as a pension fund-type asset allocation fund that aims to achieve stable medium- to long-term returns through asset allocation strategies that leverage asset managers’ unique capabilities across various asset classes. It can be considered a representative asset allocation fund that meets these criteria. Asset managers can either offer existing TRF products or design new ones for this purpose. Similar to Australia’s MySuper, each asset manager in Korea is allowed to launch only one Didim Fund, which will be incorporated and managed under the unified Didim Fund brand by the KOFIA for efficient promotion and marketing activities. This approach aims to address the limitations of the current TDF-based scheme, while highlighting the significance and utility of asset allocation funds in the retirement pension default option market. As mentioned earlier, providing efficient and proven asset allocation funds represents a highly meaningful initiative, which represents a vital role of asset management in the retirement pension market. As this is supported by the Ministry of Employment and Labor and is highly favored by employees, active support from market participants is anticipated.
1) Ministry of Employment and Labor, 2023 statistics on the management status of retirement plan assets, May 2024.
2) Other types, including REITs, amount to KRW 3.5 trillion.
3) This estimate is based on the author’s classification of fund types. Recently, FnGiude, a fund evaluation firm, has been reportedly preparing retirement pension management statistics based on the components of each fund.
4) For DB plans assets, OCIO management is only possible through a private equity fund structure, not through discretionary investment. Meanwhile, a pilot program of robo-advisor services for DC plan members is underway as part of a regulatory sandbox.
5) The vintage combinations of TDFs designed to align with specific risk levels are not only economically meaningless but also have a structural flaw. This is because eligible products must be regularly re-approved, as risk levels of TDFs fluctuate over time.
6) The concept of TRFs is akin to that of a Balanced Fund (BF) offered as a Qualified Default Investment Alternative (QDIA) in the US 401(k). While BFs can be understood as a term encompassing both TDFs and TRFs, it is reasonable to interpret BFs as TRFs, given that TRFs and BFs are presented in parallel within QDIAs. The publicly offered fund labeled as the OCIO (Outsourced Chief Investment Officer) fund can be considered similar in concept. In contrast, the general mixed fund among traditional publicly offered fund types does not meet the criteria for asset allocation funds due to its fixed stock-to-bond ratios and lack of continuous rebalancing mechanisms.
With the prospect of living up to 100 years becoming increasingly likely, the duration of retirement—characterized by a lack of income and ongoing consumption—may extend beyond the working years. Ensuring that a 100-year lifespan is a blessing rather than a disaster depends crucially on pension assets. In this respect, securing lifelong income after retirement necessitates a multi-layered pension scheme. Building on the first layer provided by the National Pension Scheme, Korea’s retirement pension scheme, introduced in 2015, will mark its 20th anniversary next year. As of the end of 2023, retirement plan assets have rapidly accumulated to KRW 382 trillion, and are projected to surpass KRW 400 trillion. Alongside the National Pension Fund (NPF), which has already exceeded the KRW 1,000 trillion mark, the retirement pension scheme has become a crucial component of private pension provision for ensuring nationwide retirement income security.
Out of KRW 1,000 trillion in assets held by the NPF, KRW 640 trillion has been generated from investment returns. Notably, the NPF has achieved an average annual return of 7.2% over the past five years, generating KRW 284 trillion in profits, which has significantly contributed to the accrual of pension assets. This long-term performance is particularly noteworthy, given that the five-year period includes 2022, the year marked by substantial valuation losses due to a downturn in the global asset management market. In contrast, retirement plans have reported an average annual return of 1.5% over the same period. Given the size of retirement plan assets, the cumulative profits from plan asset management are estimated to be less than KRW 23 trillion. The compounding effect resulting from these varying returns is particularly pronounced in the management of plan assets, which are typically invested over long periods. For example, if an employee contributes KRW 300,000 monthly over a 30-year period, they would receive KRW 360 million upon retirement under the NPF. However, with the average return of retirement plans, the accumulated amount would only be KRW 140 million. When converted into a lifetime annuity, the NPF would provide a monthly payment of KRW 1.5 million, whereas the payment from retirement plans would only amount to KRW 600,000 per month. This discrepancy represents a point where plan members annuitize their retirement benefits or opt for a lump sum payment.
In the ongoing public pension reform process, various institutional reform measures are being discussed to revitalize the retirement pension scheme, including enhanced incentives through tax benefits and legal requirements. However, the most fundamental and effective solution for boosting the scheme lies in improving investment performance. Many of the current challenges—such as streamlining the scheme, imposing restrictions on early termination and withdrawals, and mandating annuity payments—can be addressed or alleviated by increasing the returns on plan assets. This is evidenced by the voluntary and proactive participation of employees in effective pension plans, such as the US 401(k) and Australia’s Superannuation.
The key to improving performance lies in asset allocation, which has been robustly validated through both academic research and empirical evidence. It means that the restructuring of the asset management system for increasing returns should be geared toward efficient asset allocation. Building a globally diversified investment portfolio could be the beginning and end of revitalizing the retirement pension scheme. However, in practice, this objective is hard to achieve solely through individual efforts and capabilities. As demonstrated by overseas cases, the management of plan assets generally relies on indirect investment managed by external professionals rather than direct investment. Consequently, indirect investment instruments provided by external financial institutions must incorporate efficient asset allocation strategies, given that asset allocation is both the most critical and the most complex decision in plan asset management. This is why pension products offered by retirement plan providers should be centered around asset allocation funds.
Asset mix for retirement plans
The low returns on retirement plan assets are often attributed to an excessive focus on principal-protected products. Thus, a crucial step towards improving returns is to increase the weight of participating products within the overall asset composition. To this end, various policy initiatives have been adopted, such as requiring the establishment of investment committees and the preparation of the Investment Policy Statement (IPS) for Defined Benefit (DB) plans, as well as introducing the default option scheme for Defined Contribution (DC) plans. However, despite these efforts, the intended policy objectives have not been fully achieved due to various institutional constraints, which remains a challenge for Korea’s retirement pension scheme. There is also skepticism about whether simply increasing the proportion of participating plans will improve long-term returns. This skepticism arises from the fact that the returns on participating plans have not adequately delivered the corresponding risk premiums. The existing participating products, predominantly composed of traditional assets centered around bonds, exhibit an extremely conservative risk appetite. Furthermore, these products often fail to build an optimal portfolio free from idiosyncratic risk, leaving them vulnerable to the volatility of individual capital markets.
As of the end of 2023, retirement plan assets amount to KRW 382.4 trillion. Of this amount, 87.2% is allocated to principal-protected products, while participating products make up 12.8% or KRW 49.1 trillion.1) It is commonly recognized that principal-protected products are inherently safe assets and participating products are risky assets; however, this is not an appropriate classification. In terms of asset allocation by asset class, safe assets are represented by bonds, while risky assets include stocks and alternative investments. Therefore, it is reasonable to consider participating-type retirement plans as safe assets. Meanwhile, principal-protected products, which are currently classified as safe assets, should be viewed as deposits (cash) for temporarily holding funds, rather than as assets under management (AUM). However, it should be noted that statistics on asset composition from the asset allocation perspective—crucial information for managing plan assets—are not readily available.
The management status of retirement plans, periodically published by regulatory authorities, lacks asset allocation statistics by asset class, but only by product. According to the available statistics, 87.3% of the AUM for participating products, totaling KRW 42.8 trillion, are invested in collective investment securities (funds), including insurance products. These are further categorized into equity funds (KRW 14.5 trillion), mixed funds (KRW 7.1 trillion), bond-mixed funds (KRW 8.7 trillion), and bond funds (KRW 9 trillion).2) However, such product-level statistics make it challenging to accurately assess the risk-return profile of the total retirement plan assets. Information on asset allocation by typical asset class is required to construct a rational investment portfolio for plan assets. Recent discussions in global retirement pension markets focus on whether the traditional 60 to 40 ratio between stocks and bonds remains valid and how much the allocation to alternative investments should be increased. In contrast, Korea’s retirement pension market is still at a rudimentary stage regarding asset management. There is a lack of accurate understanding regarding the allocation of plan assets to stocks, which precludes such discussions within Korea.
According to the author’s estimates, the proportion of stocks in Korea’s retirement plan assets under management is less than 4.3%. In monetary terms, this translates to KRW 16.3 trillion or less out of a total of KRW 382 trillion being invested in stocks.3) For participating products, the stock-to-bond ratio is roughly estimated at 30 to 70, which substantially deviates from the traditional 60 to 40 ratio mentioned above. This suggests that even if the plan asset management structure, heavily concentrated in principal-protected products, shifts focus to participating products, it would be difficult to achieve a satisfactory level of returns. Retirement pension plans play a very minimal role in the supply and demand dynamics of Korea’s stock market. More than 60% of the total equity assets in retirement plans are allocated to foreign stocks, leaving domestic stocks to represent less than 1.6% of total plan assets, equating to KRW 7 trillion or less. Unlike the US 401(k) case, where the expansion of plan assets has driven the dramatic growth of the domestic mutual fund market, a similar outcome in Korea seems unlikely. From a social welfare perspective, DB plans have structural shortcomings, as they place the burden of asset management, including asset allocation, entirely on individuals. Given that Korea has adopted a mandatory pension scheme rather than a voluntary corporate pension scheme, it is the state’s duty and responsibility to provide efficient default options centered around asset allocation funds.
Asset allocation-focused retirement pension funds
As previously discussed, effective management of retirement plan assets hinges on asset allocation, particularly through a globally diversified portfolio. This involves combining various products across different asset classes and regions to construct an optimal individual portfolio, and continuously rebalancing the allocation to respond to capital market fluctuations. As for DC plans, it is extremely difficult for individual employees to perform these tasks successfully over a long-term period, such as 30 years or more. Consequently, plan asset management primarily relies on indirect investment strategies that leverage external expertise. In this context, Korea’s retirement pension scheme regulates or discourages direct investment in underlying assets, like stocks and bonds, while promoting the use of indirect investment instruments, such as funds.
Indirect investment involves entrusting external professionals with discretion to make investment decisions regarding asset management. This discretion can vary significantly in terms of scope and depth. For instance, when investing in equity funds, indirect investment means handing over the stock selection decisions to external professionals to build a portfolio designed to mitigate the idiosyncratic risk associated with individual companies. In DC plans, where direct investment in stocks is not allowed, indirect investment tools available for employees typically involve delegating stock selection decisions to experts. However, simply selecting the right fund product is not enough to ensure optimal performance. The overall performance of an individual employee’s portfolio largely depends on the allocation across various types of funds rather than on the specific fund selected. This is based on the principle that the long-term performance of asset management is primarily determined by Strategic Asset Allocation (SAA).
To enhance the returns of retirement plans through the effective use of indirect investment tools, it is crucial to entrust not just stock selection but also asset allocation decisions to experts. The most straightforward method for such entrustment involves discretionary mandates. Examples of discretionary mandates include Outsourced CIO (OCIO), which has been increasingly utilized in DB plans, and robo-advisors in DC plans. However, the primary means of indirect investment for retirement plan assets has been collective investment securities in the form of publicly offered funds, while discretionary mandates are not allowed.4) This underscores the need to further expand the availability of asset allocation-focused retirement pension funds in the form of publicly offered funds.
Asset allocation-focused retirement pension funds should fulfill the following two criteria. First, they should establish a globally diversified investment portfolio across different asset classes and regions. Rather than focusing on single asset types such as stocks or bonds, the portfolio should encompass all available traditional and alternative investment assets to optimize risk diversification across different markets. This is a prerequisite in the Korean context, where a tendency toward over-concentration in specific asset classes leads to repeated loss of investment confidence. Risk diversification helps mitigate return volatility by allocating assets across different countries and regions. Taken together, it is necessary to build a global portfolio that invests in a variety of assets from multiple countries. Second, a regular and continuous portfolio rebalancing strategy should be incorporated into these funds. Individual asset allocation funds target a specific risk-return profile, which necessitates systematic management to maintain this profile as market conditions evolve. For individual plan asset management to achieve its objectives through indirect investment, it is vital to offer a comprehensive asset allocation fund, which meets both criteria outlined previously as a single product. In addition, retirement plan assets contributed by the majority of DC plan members should be managed through such funds. This implies that eligible default options must be presented as asset allocation funds.
As observed in overseas cases, Target Date Funds (TDFs) and Target Risk Funds (TRFs) are representative asset allocation funds utilized for retirement plans. TDFs, a typical type of asset allocation fund, adjust the level of risk according to a predetermined glide path based on a globally diversified portfolio, with the aim of aligning investments with the retirement date. In advanced pension markets where default option schemes are well established, a majority of DC plan assets are managed through TDFs. In Korea’s default option scheme for retirement plans, which operates as a pre-designated investment system, eligible products are predominantly offered as portfolios composed of TDFs. Given that Korea’s pre-designated investment system is governed by the suitability rule based on individual risk appetites, it is both irrational and inefficient to present asset allocation funds solely as TDF combinations.5)
Given the structure of Korea’s pre-designated investment scheme, the asset allocation fund suitable for eligible default option products is the TFR type. TRFs are asset allocation funds that are designed as a single product, combining various assets and incorporating continuous rebalancing to target a specific level of risk.6) They offer a diversified investment portfolio while aligning with risk preferences based on the suitability rule. However, there are currently only a few TRFs available among the eligible products in the pre-designated investment scheme. For a product to be approved as eligible for retirement plans, a proven track record in the market is required. Unfortunately, there are a limited number of TRFs in the publicly offered fund market, which meet such a requirement. In this regard, the immediate task of the asset management industry is to provide high-quality asset allocation funds with a proven track record.
Conclusion and implications
The Ministry of Employment and Labor oversees the retirement pension scheme, as retirement plans fall within the scope of labor and social welfare systems. The primary objective of the retirement pension scheme is to enhance employees’ entitlement to retirement income. This should not be viewed as a passive measure to protect employees’ entitlement from corporate bankruptcy. In a broader sense, it should be understood as a means to accumulate plan assets to ensure stable income security for employees in their post-retirement years. In the retirement pension scheme, finance serves as a means to achieve this objective. Consequently, it is the responsibility of asset managers, rather than retirement pension providers, to significantly increase plan assets. This means that increasing the returns on retirement plans is both a duty and a challenge for asset managers. The primary method for actively boosting returns is asset allocation, rather than stock selection. Therefore, competition among asset managers for the management of plan assets should focus on their asset allocation capabilities.
The Korea Financial Investment Association (KOFIA) has recently sought to introduce TRF-type asset allocation funds under the name “Didim Fund” into the pension market. The Didim Fund is defined as a pension fund-type asset allocation fund that aims to achieve stable medium- to long-term returns through asset allocation strategies that leverage asset managers’ unique capabilities across various asset classes. It can be considered a representative asset allocation fund that meets these criteria. Asset managers can either offer existing TRF products or design new ones for this purpose. Similar to Australia’s MySuper, each asset manager in Korea is allowed to launch only one Didim Fund, which will be incorporated and managed under the unified Didim Fund brand by the KOFIA for efficient promotion and marketing activities. This approach aims to address the limitations of the current TDF-based scheme, while highlighting the significance and utility of asset allocation funds in the retirement pension default option market. As mentioned earlier, providing efficient and proven asset allocation funds represents a highly meaningful initiative, which represents a vital role of asset management in the retirement pension market. As this is supported by the Ministry of Employment and Labor and is highly favored by employees, active support from market participants is anticipated.
1) Ministry of Employment and Labor, 2023 statistics on the management status of retirement plan assets, May 2024.
2) Other types, including REITs, amount to KRW 3.5 trillion.
3) This estimate is based on the author’s classification of fund types. Recently, FnGiude, a fund evaluation firm, has been reportedly preparing retirement pension management statistics based on the components of each fund.
4) For DB plans assets, OCIO management is only possible through a private equity fund structure, not through discretionary investment. Meanwhile, a pilot program of robo-advisor services for DC plan members is underway as part of a regulatory sandbox.
5) The vintage combinations of TDFs designed to align with specific risk levels are not only economically meaningless but also have a structural flaw. This is because eligible products must be regularly re-approved, as risk levels of TDFs fluctuate over time.
6) The concept of TRFs is akin to that of a Balanced Fund (BF) offered as a Qualified Default Investment Alternative (QDIA) in the US 401(k). While BFs can be understood as a term encompassing both TDFs and TRFs, it is reasonable to interpret BFs as TRFs, given that TRFs and BFs are presented in parallel within QDIAs. The publicly offered fund labeled as the OCIO (Outsourced Chief Investment Officer) fund can be considered similar in concept. In contrast, the general mixed fund among traditional publicly offered fund types does not meet the criteria for asset allocation funds due to its fixed stock-to-bond ratios and lack of continuous rebalancing mechanisms.