“Why switch when everyone else was making money?” Why are 150,000 people who switched retirement plans in tears?

[Financial News] A warning light has come on across the retirement pension market, which is meant to serve as a safety net for people in retirement. Workers who switched en masse from defined-benefit (DB) to defined-contribution (DC) plans in pursuit of a short-term stock-market rally suffered double-digit losses after the market turned down just after their switch. Target Date Funds (TDFs), considered a leading safe investment option, also posted widespread losses amid a sharp rise in interest rates, calling into question the investment strategy based on retirement dates. Moreover, many public institutions have failed to meet the statutory minimum funding requirement for DB retirement plans, which employers are responsible for, prompting calls for urgent, system-wide reforms.

According to data submitted by the Financial Supervisory Service to People Power Party lawmaker Park Seong-hun, a member of the National Assembly’s Political Affairs Committee, 149,710 participants switched from DB to DC plans in June and July this year, a 181.2% surge from 53,242 in the same period a year earlier. The two months accounted for 44% of the 340,156 participants who switched from January through July this year.
The rush to switch coincided with a stock-market rally in the first half of the year. Given that a switch typically takes about a month, analysts say participants likely opted for DC, which allows them to manage their own investments, around June, as the KOSPI was surging toward a record high.
But the market plunged just after the switches, and losses mounted. Participants who switched from DB to DC at Mirae Asset Securities and Korea Investment & Securities between April and June recorded simple period returns of -10.7% and -10.2%, respectively, in July and August.
The problem is not just the size of the losses. Under current rules, existing pension assets transferred from DB to DC cannot be restored to DB because past service periods have already been settled. Even if an employer has a system in place to reapply DB to future service periods, the assets already transferred and the past service periods cannot be restored. This is why calls are growing for safeguards, such as a mandatory cooling-off period, against “switching without due consideration” in pursuit of short-term returns.

The TDF market, popular for its lifecycle-based asset allocation funds, was also hit, not just self-directed investors. According to Korea Retirement Pension Data (Glide), on the 14th, 185 of the 197 TDF products in South Korea—93.9%—recorded losses last September.
The sharp rise in interest rates—driven by the Federal Reserve System (Fed) raising its benchmark rate to 3.75%-4.0% a year and the U.S. 10-year Treasury yield topping 5%—triggered a steep drop in bond prices. The U.S. Aggregate Bond ETF (AGG) fell 2.61%, more than the S&P 500, which declined 0.33%. With stocks and bonds falling together, the TDF asset-allocation mechanism of “increasing bond holdings to guard against volatility” broke down. An unusual reversal even saw the average loss for TDF2025 (-0.97%), with its high bond allocation for investors nearing retirement, exceed that of TDF2060 (-0.80%), designed for younger investors.
In particular, “the asset mix within the portfolio,” rather than the retirement year (vintage), determined success or failure. The gap in average returns between vintages was at most around 1.15 percentage points, while the difference between the best- and worst-performing funds within the same vintage reached as much as 5.57 percentage points. Only a handful of funds—those with higher allocations to domestic stocks or currency hedges (H) suited to falling exchange rates (a stronger won)—managed to stay in positive territory.

The DB retirement pension system, under which employees do not bear investment risk, has also revealed structural weaknesses.
According to data obtained from the Ministry of Employment and Labor by the office of People Power Party lawmaker Kim Wi-sang, a member of the National Assembly’s Climate, Energy, Environment and Labor Committee, as of August this year, 46 of the 214 public institutions that had adopted DB plans (21.5%) failed to meet the statutory minimum funding ratio of 100%.
By institution, the Taekwondo Promotion Foundation had the lowest funding ratio, at 39.17%. Bundang Seoul National University Hospital (43.61%), the Korea Transportation Safety Authority (46.35%) and the Korea Road Traffic Authority (49.57%) also fell short of half the required level. Many other major public institutions were on the list, including the Korea Land and Geospatial Informatix Corporation (75.07%), the Korea Rural Community Corporation (85.61%) and the Korea Environment Corporation (95.88%).
A funding shortfall does not directly mean that retirement benefits will go unpaid immediately. However, if large-scale retirements or sharp wage increases occur while pension assets are inadequate, the institution’s financial burden will inevitably rise all at once. Under current law, employers with a funding ratio below 95% must make up at least one-third of the shortfall by the next fiscal year; those that fail to do so face administrative fines.

Experts agree that participant education must go hand in hand with institutional reforms to ensure that retirement pensions, a key pillar of retirement income, are not swayed by short-term market conditions or left in poor shape.
Lawmaker Park Seong-hun criticized the government, saying, “Although this is a choice that determines the fate of retirement savings, the government effectively stood by as people switched indiscriminately during a bull market,” and added, “Risk disclosures and investment education for participants should be mandatory, and a cooling-off process should be established.”
Lawmaker Kim Wi-sang also said, “It is a serious case of fiscal negligence for public institutions run on taxpayers’ money not even to meet statutory standards,” and urged them to promptly draw up plans to bring funding back to normal.

[email protected] Moon Young-jin Reporter