© Reuters. Like the US 401k… Korea also opens the path to ‘pension millionaires’
“Recently, the volatility of the stock market is increasing, but few customers withdraw their money from Target Date Fund (TDF).”
On the 14th, the Tiro Price headquarters in Baltimore, Maryland, USA was calm. The day before yesterday, the S&P 500 and Nasdaq fell by 3.88% and the Nasdaq index down 4.68%. Wyatt Lee, head of the company’s target date strategy division, smiled and shook his head when asked, “Aren’t investors nearing retirement agitated by the sharp decline in the stock market?” “After experiencing the global financial crisis in 2008 and the COVID-19 crisis in 2020, American investors have the belief that they can always win if they overcome short-term volatility and invest in stocks for the long term,” he explained.
From the 12th of next month, a pre-designated management system (default option) will be introduced for domestic defined contribution (DC) retirement pensions and individual retirement pensions (IRP). A default option is a system in which the retirement pension is managed with a pre-determined product unless the employee gives separate management instructions. Until now, if there was no operation instruction, money was automatically put into the principal and interest guarantee product. 90% of retirement pensions were left in the principal and interest guarantee products, leading to a ‘rat-tailed rate of return’ of 1% per year.
In the United States, the default option was activated with the enactment of the Pension Protection Act in 2006. Employers exclude principal-guaranteed products as much as possible and set TDF or stock/bond hybrid funds as basic options, which adjust the proportion of stocks and bonds according to the retirement date of workers. Retirement pensions are automatically invested in the product if the employee does not express an objection.
Even if there is a loss from the product designated by the employer, if it meets the government’s standards, it is not liable for legal liability, such as a lawsuit. This is because workers are not exposed to risky assets such as stocks and cannot accumulate sufficient funds for retirement if they have only principal and interest guaranteed products.
As a result, 67.8% of the investment assets of the US DC-type retirement pension 401k were invested in stocks. The 401k has recorded an average annual return of 8% for the past 10 years. Some workers have become millionaires just by investing in their pensions. This is the background behind the push to introduce default options for retirement pensions in Korea. U.S. where full retirement pension can be invested in stocks… There is no ‘alchemy run’ even in a sharp decline
“The risk of old-age poverty is greater than the loss”… Afraid of losing the last bastion of retirement pay?’ Retirement pension investors are long-term investors. If you invest for a long time in a principal-guaranteed product, you will not be able to accumulate sufficient old-age funds.’
Such phrases appear constantly in the regulations that the US Department of Labor presents basic options for retirement pension products (QDIA, Qualified Default Option Product) to companies. This phrase contains the basic philosophy of the US government, which introduced the automatic subscription system and default option system for retirement pensions in 2006. At the time, the U.S. government judged that the risk of retiring without sufficient old-age funds was greater than the risk of losing money by investing in risky assets such as stocks. In the 2000s, the US government had to solve the financial burden caused by the increase in the average life expectancy of the people. More workers wanted to join a retirement pension plan. However, the enrollment rate was low. This was because the procedure was cumbersome. The government encouraged the introduction of an automatic retirement pension system at work.
However, companies were hesitant to introduce an automatic subscription system. In order for automatic subscription to be possible, a default option product set by the company was required. If a stock-type fund with good returns but high risk was presented as a default option, and there was a loss, there was a risk of being sued by workers. From the point of view of corporate retirement pension managers, they had no choice but to either not introduce an automatic subscription system, or to set principal options such as deposits and savings accounts that are ‘safe from litigation’ as basic options.
Richard Thaler, a behavioral economist and professor of economics at the University of Chicago, famous for author of the book Nudge, criticized the practice at the time, saying, “Nuding people to make overly safe investments is as irresponsible as nudging people to make overly risky investments.” did. Nudge, which means ‘poke the side’, refers to a device that leads people to change their behavior through gentle intervention, not coercion. The U.S. government decided to apply a nudge because the government decided that workers could not save enough money for retirement with an asset-allocation fund investment incentive product. In 2006, the Pension Protection Act (PPA) was enacted with an automatic subscription system as the main focus, and the US Department of Labor presented a product group (qualified default option products, QDIA) that companies can select as basic options. △Target Date Fund (TDF) △Balance Fund △Discretionary Investment Account △Principal Guarantee Fund, etc. were included.
The government has decided to give a disclaimer for loss of principal when a company selects a default option product within it. It is specified that the principal guarantee type product can be used only for a limited period within 120 days. With the introduction of the exemption clause, the interest of corporate retirement pension managers has shifted from ‘not getting sued’ to ‘preparing workers’ retirement assets’. After the explosive growth of the TDF market, the golden age of TDF has begun in the United States. According to U.S. asset management company Vanguard, 98% of customers that implemented an automatic subscription system chose TDF as the default product last year. TDF is a product that adjusts the weight of stocks and bonds according to the life cycle. It has a rebalancing structure that increases the proportion of risky assets such as stocks when the age group is low, and increases the proportion of safe assets such as bonds as the time of retirement approaches.
Recently, TDFs have evolved to be more aggressive. TDFs targeting Millennials and Generation Z are competing to increase their share of stocks. Tiro Price recently raised its share of TDFs to 98% of TDFs with more than 30 years of retirement. The U.S. imposes no limits on the share of stocks in retirement plans.
Wyatt Lee, head of Target Dating Strategy Division at Tiro Price, said, “Short-term volatility in the stock market is not a problem for workers in their 20s with 30 to 40 years left until retirement. It can increase like this,” he explained.
It is no longer difficult to find workers who have become millionaires just by investing in pensions. According to Fidelity, the number of ‘one millionaires’ with more than $1 million in 401k pension assets based on their clients reached a record 442,000 as of the end of last year.
Even with the recent stock market downturn, American workers are investing more in their retirement plans than ever before. According to Fidelity, in the first quarter of last year, U.S. customers put an average of 14% of their monthly salary into retirement savings contributions. This is the highest percentage since Fidelity started counting.
Washington/Baltimore = Reporter Ko Jae-yeon yeon@hankyung.com
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