Types of Retirement Plans
What are the main types of retirement plans?
- There are three main types of retirement plans: defined benefit pension plan, defined contribution pension plan and individual retirement plan (Article 2(7) of Act on the Guarantee of Workers’ Retirement Benefits):
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Defined benefit pension plan
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Defined contribution pension plan
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Individual retirement plan
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▪ A retirement plan in which an employee receives a predetermined amount of benefits upon retirement. ▪ The employer makes contributions toward the employee’s retirement account and manages it.
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▪ A retirement plan in which the employer makes a predetermined amount of contributions, corresponding to one-twelfth of the annual wage, to the employee’s retirement account. ▪ The employee manages his/her own retirement account and receives the sum of contributions and accrued investment earnings upon retirement.
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A program allowing an employee to save retirement benefits received upon resignation or retirement in his/her individual savings account for his/her later years.
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Defined Benefit Pension Plan
Definition of the defined benefit pension plan
- A ‘defined benefit pension plan’ refers to a retirement plan in which an employee receives a predetermined amount of benefits upon retirement (Article 2(8) of Act on the Guarantee of Workers’ Retirement Benefits).
- The employer annually contributes to the retirement plan, by depositing funds to the financial institution that serves as the plan trustee. The retirement account is managed by the employer, and the employee receives a predetermined amount of benefits upon retirement, regardless of the outcome of investment (Ministry of Employment and Labor website:
https://www.moel.go.kr/english/).
Establishment of a defined benefit pension plan
- An employer wishing to establish a defined benefit plan must prepare rules for a defined benefit pension plan stipulating the following matters with the consent of the representative of the employees or after asking for his/her opinions, and then report such rules to the Minister of Employment and Labor about the charter (Article 13 of Act on the Guarantee of Workers’ Retirement Benefits, and Article 4(1) of Enforcement Decree thereof):
· Matters concerning the selection of a retirement pension trustee;
· Matters concerning enrollees;
· Matters concerning the contribution period;
· Matters concerning the amount of benefits;
· Matters concerning securing the financial sources necessary to cover the benefits;
· Matters concerning types of benefits and eligibility requirements;
· Matters concerning the signing and cancellation of the operational management service and asset management service agreements and the transfer of the contract in the event of the cancellation;
· Matters concerning the notification of the status of operation of the plan;
· Matters concerning the retirement of an enrollee and other circumstances in which benefits are paid, and the payment procedures;
· Matters concerning allowable reasons for the termination or the suspension of the retirement plan and related procedures;
· Matters concerning the payment of fees toward operational management and asset management services;
· Matters concerning the method and the procedures of educating enrollees about the retirement plan; and
· Matters on how to handle various issues that may arise in the case where the employeris under operational and asset management service agreements with more than onefinancial institution (including the designation of a financial institution for the transfer ofretirement benefits in the case where an enrollee does not have a designated individual retirement account or the copayment account for the SMEretirement pension fund plan ).
Defined Contribution Pension Plan
Definition of the defined contribution pension plan
- A ‘defined contribution pension plan’ refers to a retirement plan in which an employer makes a predetermined amount of contributions to the employee’s retirement account (Subparagraph 9 of Article 2 of Act on the Guarantee of Workers’ Retirement Benefits).
- Employer contributions (at least one-twelfth of the annual wage per year) are deposited to the individual retirement accounts of employees according to a set schedule. The account is directly managed by the employee, who can also make his own contributions in addition to the employer contributions (Ministry of Employment and Labor website:
https://www.moel.go.kr/english/).
Establishment of a defined contribution pension plan
- An employer wishing to establish a defined contribution pension plan must prepare rules for a defined contribution pension plan stipulating the following matters with the consent of the representative of employees, or after asking for his/her opinions, and then report such rules to the Minister of Employment and Labor about the charter (Article 19(1) of Act on the Guarantee of Workers’ Retirement Benefits, and Article 10(2) of Enforcement Decree thereof):
· Matters concerning about employer contributions;
· Matters concerning the calculation and deposit of employer contributions;
· Matters concerning the management and the investment of contributions;
· Matters concerning the method of managing and investing contributions and information disclosure;
· Matterson the pre-designated management system
· Matters concerning the early withdrawal of contributions;
· Matters concerning the selection of a retirement pension trustee;
· Provisions about enrollees;
· Matters concerning the contribution period;
· Matters concerning types of benefits and eligibility requirements;
· Matters concerning the signing and the cancellation of the operational management service and asset management service agreements and the transfer of the contract in the event of the cancellation;
· Matters concerning the notification of the status of operation of the retirement plan;
· Matters concerning the retirement of an enrollee and other circumstances in which benefits are paid, and the payment procedures
· Matters concerning allowable reasons for the termination or the suspension of the retirement plan and related procedures;
· Matters concerning the payment of fees toward operational management and asset management services; and
※ While fees are normally paid by the employer, the employee is responsible for paying any fees associated with making additional contributions on his or her own behalf.
· Matters concerning the method and the procedures of educating enrollees about the retirement plan.
Individual Retirement Plan
Definition of the individual retirement plan
- An ‘individual retirement plan’ refers to a program allowing an employee to deposit his/her retirement benefits received upon resignation or retirement in his/her individual account for his/her later years (Ministry of Employment and Labor webstie:
https://www.moel.go.kr/english/).
- Individuals with an individual retirement plan make personal contributions to their accounts (the body of Article 24(3) of Act on the Guarantee of Workers’ Retirement Benefits).
※ However, the total amount of annual contributions cannot exceed KRW 18 million (referring to the total sum of the contributions made to the entire individual retirement accounts if more than one exists). The total amount does not include a lump sum of retirement benefits received from the previous employer (Proviso of Article 24(3) of Act on the Guarantee of Workers’ Retirement Benefits, and Article 17-2 of Enforcement Decree thereof).
Establishment of an individual retirement plan
- To be eligible to establish an individual retirement account, an individual must correspond to at least one of the following (Article 24(2) of Act on the Guarantee of Workers’ Retirement Benefits, and Article 17 of Enforcement Decree thereof):
· Individuals who received their retirement benefits in lump-sum distribution;
· Enrollees in a defined benefit plan, defined contribution plan, or SME retirementpension fund plan who wish to set up an additional individual retirement plan with their personalcontributions;
· Self-employed individuals;
· Individuals who worked at the workplace, which does not offer a retirement plan, for less than one year, based on the length of continuous employment;
· Individuals whose weekly hours worked without a retirement plan is less than 15 hours, based on a four-week average;
· Individuals covered by a lump-sum retirement benefits program;
· Civil servants;
· Military personnel;
· Teachers; or
· Employees of special post offices.