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SOUTH KOREA: Legislative Change in Korea: Default Option in DC Investment
 
 
National Assembly has approved the amendment of Employee Retirement Benefit Security Act as at December 8, 2021, requiring all DC sponsors to state the “Default Option” of investment in the plan document.
 
The defined contribution (DC) plan has experienced rapid growth in terms of asset size since it was first introduced in Korea in 2005. As of 2020, more than 30% of the corporate pension plan assets in Korea are DC plan assets.
Although DC plan has experienced rapid growth in terms of its volume, the general public generally have a negative perception on employer providing DC plan. For most of the employees, the DC plans are perceived as “loss” compared to DB plan, as its low return on asset is viewed “highly unlikely” to outperform the employees’ salary increase.
According to the Ministry of Employment & Labor, the average investment return from overall DC plan asset during year 2020 was 3.47% - when Korean equity market has yielded 30.75% and the global equity market has yielded 15.84% during the identical span of time period. This difference is due to the conservative portfolio of DC plan assets – where the plan assets are highly concentrated with cash or principal-interest guaranteed products like time deposit. (83.3% of plan assets are invested in cash or PIG).
Korean government believed that the major reason for conservative style of DC investments is due to employees lacking the interest and the expertise on pension investment. Korean government had attempted to increase the interest and the knowledge on DC investment for general public by tightening the regulatory burden on the service providers and/or promoting the different employee education programs. However, without an apparent success in result, the default option is now required for DC plan based on the latest legislative changes.
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