By: HUB’s EB Global Benefits Team

The government of South Korea continues its quest to transform the statutory severance program from an unfunded defined benefit obligation into a funded Defined Contribution (DC) arrangement.

In principle, this move is welcome by American multinational companies which seek to curtail the financial risks and accounting burdens of defined benefit programs. Most US multinationals have elected to transform the delivery of the mandatory severance benefit through DC plans that effectively shift the investment risk to the plan participants.

The latest reform requires employers sponsoring approved DC programs to provide appropriate investment options for the employees. The investment choices must include one or more to be designated as default options.

The eligible investment products that qualify as default investments under the new rules include principal-guaranteed products, target date funds, balanced funds, asset allocation funds, money market funds, and social overhead capital funds.

The deadline for compliance is rapidly approaching. Plan documents must be updated by July 2023 and must be approved by the Ministry of Employment and Labor.

The main intent behind the reform is to improve the retirement plans’ investment rates of return by encouraging participants to invest in products with higher risk/return profiles. According to pension industry figures, more than 80 percent of South Korea’s DC pension plan assets are held in 1 – year time deposits that yield low returns-often failing below the inflation rate.

On the surface, this appears to be a mere administrative task. However, as the employer has a leading role in the selection of the fund managers, investment options as well as the defaults, a set of fiduciary responsibilities are implicitly attached to the package – due diligence for the selection of asset managers, investment products and default option; vigorous employee communication and financial education; accurate record-keeping; investment performance monitoring; and periodic assessments are some of the additional steps that companies will have to adopt in order to ensure both acceptable plan performance and fiduciary responsibility risk mitigation that will be heightened by the reform.

Plan Documents Must Be Updated by July 12, 2023

How this impacts you

  • Employers must endeavor to comply with the terms of the reform by the July 2023 deadline.
  • Strong employee communication and financial education initiatives will be needed for participants to make informed investment choices.
  • Employers are encouraged to undertake measures to diligently fulfill fiduciary responsibilities implicit in the reform.

Next steps

  • Develop solid processes for the selection and periodic review of the performance of fund managers and investment choices, as well as monitoring employee fund selection patterns.
  • Construct a diversified range of investment choices that are relevant to employees for timely compliance with the reform.
  • Communicate changes and educate employees on investment options.
  • Implement a fiduciary education program to ensure that company-appointed individuals are appropriately trained and provide protections against potential claims by participants.

If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.