Financial authorities will cap the allocation to any single foreign country at 80% to ensure the stable management of target date funds (TDFs), which have rapidly emerged as a key investment vehicle for retirement. The move comes on concerns that concentration in one country as markets fluctuate could magnify risk.
On the 31st, the Financial Supervisory Service announced measures for the stable management of TDFs, saying it will introduce a cap on exposure to specific countries and revise corporate disclosure forms so investors can easily check management strategies, effective Apr. 1.
According to the Financial Supervisory Service (FSS), the net asset value (NAV) of TDFs stood at 2.56 trillion won as of the end of last year, up 900 billion won (55.2%) from a year earlier. The TDF market has grown more than 18-fold, rising from 140 billion won in 2018 to over 1 trillion won in 2021 and surpassing 2.5 trillion won last year.
Notably, retirement accounts accounted for 95.3% of TDF net assets last year, underscoring their appeal as a vehicle for retirement funding. Specifically, workplace retirement plans made up 83.8% and personal pensions 11.5%. During the period, TDFs delivered an annual return of 13.7%, more than double the overall retirement plan return of 6.5% and nearly four times the default option return (3.7%).
Currently, 20 asset managers run 199 TDF products, with the top five managers accounting for 84.4% of total TDF net assets. Of these, 195 are "qualified TDFs," where the share of risk assets does not exceed 80%.
The FSS said it introduced the measures due to the TDF market's growth alongside a structure overly tilted toward specific countries. As of the end of last year, TDFs allocated an average of 43% to the United States, and 80.1% of TDFs invested in the United States.
An FSS official said, "The average allocation to the Korean capital market is 4.4%, and the highest Korea allocation among TDFs is 35.4%," adding, "Since 2022, the average allocation to the United States has been on the rise, showing a clear concentration in U.S. investments."
Even among TDFs with the same target retirement date, returns varied widely depending on asset composition and management strategy. For example, last year the gap between the maximum and minimum returns among TDFs with a 2055 target date reached 24.5 percentage points.
In response, the FSS mandated that the combined allocation to stocks and bonds of any specific foreign country within a TDF be limited to within 80% of invested assets. It also shifted from a rule that only capped the maximum allocation to "stocks," which could be misread as imposing no limits on non-equity risk assets, to a standard based on "safe assets."
That is, the share of cash-like assets and debt securities must be set at 20% or more of the total assets of the collective investment scheme before the target date, and 60% or more after the target date.
In addition, to make it easier for investors to review strategies, disclosure forms must include both tables and graphs and clearly show target weights for risk assets and safe assets in five-year increments, including the target date. Whether the TDF qualifies as a "qualified product" must also be stated. The FSS said products that meet the qualified TDF criteria must include "qualified" in the TDF name.
The FSS explained that while TDFs with higher domestic allocations face less currency risk, excessively high domestic weights can reduce exposure to global markets, potentially limiting the range of performance fluctuations and return opportunities. It urged investors to select TDFs that match their investment profiles. Going forward, the FSS plans to upgrade the Integrated Pension Portal website to make it easier to compare TDF products.
An FSS official said, "Using currency-hedged TDFs to offset exchange-rate risk is one possible approach," adding, "Over long horizons, total fees of TDFs have a cumulative impact on long-term returns, so it is important to compare total fee levels across various TDFs."
The official added, "The FSS will work to foster a stable operating environment so that TDFs can serve as medium- to long-term investment products for retirement savers, including by fine-tuning the qualified criteria."