Introduction of the default option for the defined contribution retirement pension plan

6 July 2023 2 min read

By Hoin Lee

At a glance

Under the Employee Retirement Benefit Security Act (ERBSA) amended as of 11 January 2022, an employer is required to revise its retirement pension rules to add the terms concerning the pre-designated operation scheme, the "default option".
The deadline is 12 July 2023.

This article has been reproduced with the permission of the authors Weon Jung Kim, Ki Young Kim, Paul Cho and Hoin Lee at Kim & Chang.

What is the default option?

The default option is a pension operation scheme under which a pension service provider operates the pension reserves of the defined contribution retirement plan (DC pension plan) in a pre-designated operation scheme if a pension participant fails to select a particular operation scheme. There has been concern that due to the pension participants’ lack of financial expertise and interest, the pension reserves have primarily focused on principal-guaranteed products with low interest rates, and as a result, the return on investments for retirement pension plans has remained low, preventing employees from enjoying sufficient retirement benefits. To resolve this issue, the default option has been newly introduced.

Amended ERBSA

Under the amended ERBSA, an employer is required to obtain consent from the employee representative representing a majority of the employees (or the labour union if it is a majority labour union) by 12 July 2023 to add the terms concerning the default option in the retirement pension rules. Accordingly, an employer who has established a DC Pension Plan should select one of the default options provided by a pension service provider and then undertake to obtain consent for amending the pension rules through the aforementioned process.

Considering that most companies have not amended their retirement pension rules despite the upcoming deadline for introduction of the default option, a bill was recently proposed and submitted to the Environment and Labour Committee of the National Assembly on 5 June 2023 to grant a one-year grace period for such implementation. However, in light of the National Assembly’s schedule, it is unlikely that the bill would be passed by 12 July 2023.

Failure to comply

In principle, failing to meet the 12 July 2023 deadline regarding the default option may result in an administrative fine of up to KRW5 million. The Ministry of Employment and Labour has stated that it will guide companies to comply with this requirement through corrective orders, rather than immediately imposing fines.

Nevertheless, it should be noted that it is the employer’s obligation to amend the retirement pension rules under the law and that the employer should select one of the default options provided by a pension service provider and obtain the employee representative’s consent. Therefore, employers who have yet to adopt the default option need to take the necessary steps to fulfil the employer’s legal obligations.