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Implementation of Pre-Designated Operation System for Pension Plans


We provide below an overview of the amendment to the Employee Retirement Benefit Security Act (the “ERBSA”) and its subordinate legislations, which introduce a pre-designated operation system for the defined contribution retirement pension plan (the “DC Pension Plan”) and the individual retirement pension plan (the “IRP Pension Plan”).

In many cases, accrued pension funds have depended on products guaranteeing a principal and certain interest (e.g., deposits, installment savings, etc.) notwithstanding their low interest rates for various reasons, such as ignorance by employees, lack of financial expertise, etc.  As a result, the return on investment for retirement pension plans has remained in the 1%t range over the past five years, preventing employees from enjoying sufficient retirement benefits.

Considering the foregoing, the newly amended ERBSA has established a pre-designated management system (default option) under which an employee’s DC Pension Plan or IRP Pension Plan would be automatically operated based on the pre-designated products (to address employees’ lack of attention/indifference in managing their pension plans).  The details of the amendment are as follows:

  • A pension service provider shall prepare a pre-designated operation method to be proposed to employees and apply for an approval by the Minister of Employment and Labor (after prior deliberation by the Deliberation Committee under the Ministry of Employment and Labor).

  • The types of products subject to approval are products that guarantee principal and interest, collective investment securities products (funds), and portfolio products that combine a principal/interest guarantee and fund products.

  • Once the pension service provider obtains approval from the Minister, the key information of the pre-designated operation method shall be presented to the employer, and the employer shall select a pre-designated operation method to be adopted.  Such an adoption must be reflected in the relevant pension bylaws, and the employer must obtain consent from the employee representative.

  • The employee receives key information on the products reflected in the pension bylaws from the pension service provider and selects a pre-designated operation method.

  • The pre-designated operation method is applicable if (i) the employee does not provide any instruction when he/she newly joins the pension plan or the existing pension plan has matured, or (ii) the employee wants such a pre-designated operation method to apply.  Employees can opt in or out of the pre-designated operation method (and choose other products) at any time.

  • If the pension service provider wants to make changes to the existing method, which has already been approved by the Minister of Employment and Labor, the pension service provider must obtain additional approval for such changes.  Employees shall be notified of the changes and can choose another product if they are dissatisfied with the changes.

It should be noted that (i) the pre-designated operation method is a statutory requirement for all businesses that have adopted a DC Pension Plan, and (ii) consent from the employee representative is required for the adoption and amendment of pension bylaws.

The failure to prepare and file pension bylaws is subject to an administrative fine, and the Ministry of Employment and Labor has announced its plans to regularly inspect businesses that have not adopted a pre-designated operation method.  Accordingly, for businesses that currently operate a DC Pension Plan, it would be prudent to carefully review the above amendment and adopt a pre-designated operation plan as required.


[Korean Version]