[Practical Finance] "Retirement pensions locked in fixed interest rates... Moving to TDFs that capture both stability and returns"

O Won-seok, Head of Pension Marketing Team at Korea Investment Management

[Asia Economy Reporter Eunmo Koo] "Despite low interest rates, it is unfortunate that many people still subscribe to fixed interest rate products for stability. Returns that fail to outpace inflation are equivalent to losses. Target Date Funds (TDFs) can be an alternative that meets the demand for relatively stable yet higher returns."

On the 12th, Oh Wonseok, head of the Pension Marketing Team at Korea Investment Trust Management, expressed in an interview with Asia Economy his confidence that TDFs will become a key product that can secure both stability and profitability as retirement pension funds, which were previously concentrated in fixed-rate products, shift to investment products due to low interest rates.

Oh emphasized that in an era where low interest rates and low growth have become the new normal, the focus must be on increasing returns to build the targeted retirement funds within a limited period and with available funds. He pointed out that most domestic retirement pension funds are subscribed to fixed interest rate products with predetermined interest, and in a continuously declining interest rate environment, fixed-rate products become an obstacle to forming retirement assets.

He explained that if one seeks stable long-term investment while solving the low return problem, TDFs?designed to prepare retirement funds through various techniques such as global diversification, automatic rebalancing, and glide path (asset allocation curve)?can be an alternative.

Oh highlighted that TDFs reflect the characteristics of pensions as ultra-long-term, installment-type products aimed at creating an appropriate level of retirement funds. He said, "TDFs are almost the first pension-specialized products designed to fit the various features of pension systems." He introduced the advantages of TDFs, stating, "By investing in various global sub-funds for ultra-long-term installment investments, they reduce risks that may arise from concentrated investments, and as retirement approaches, they lower the proportion of stock investments to reduce the risk of declines that may occur just before retirement."

If the interest rates on fixed-rate products such as deposits are unsatisfactory or if you are a beginner investor just starting, considering TDF subscription is worthwhile. Oh advised, "I especially want to recommend it to young people and those with many years of economic activity ahead." Rather than jumping into stock investments without sufficient study and increasing the probability of losses, TDFs allow for automatic asset allocation that adjusts investment strategies according to market conditions, enabling appropriate continuous investment aligned with market trends. This can be a way to catch both the main job and returns.

Even if considering TDF subscription, investors may be confused about which product to choose among the various offerings from different asset management companies. Each TDF is labeled with a number indicating the expected retirement year, allowing investors to select products based on their anticipated retirement timing. He explained, "The higher the number on the TDF, the higher the stock proportion; the lower the number, the lower the stock proportion." He added, "TDFs with numbers like '2050' and '2045' have a high stock ratio, making them suitable for young beginners or investors with an aggressive investment style who have many years of economic activity ahead, while TDFs with lower numbers like '2025' are suitable for those close to retirement or with a conservative investment style."

Oh expressed expectations that if a default option (automatic enrollment system) is introduced in domestic retirement pensions in the future, more funds will flow into TDFs, leading to rapid market growth. The default option is a system where if a retirement pension subscriber does not select an investment product, they are automatically enrolled in a product designated by the company. In the U.S., the default option was introduced with the passage of the Pension Protection Act (PPA) in 2006, which led to rapid growth of the TDF market.

He said, "In the U.S., various products have long been institutionalized as default options for retirement pensions, but after a long competition, more than 85% of companies now choose TDFs as their default option." He predicted, "If the default option is introduced domestically and the TDF market expands, it will change the investment tendencies of many investors who have experienced failures by focusing on short-term returns and concentrating investments in a single stock or country. This will expand the culture of long-term investment and produce many successful investors."

This content was produced with the assistance of AI translation services.