Retirement Pension: DB · DC · IRP
Defined Benefit / Defined Contribution / Individual Retirement Pension
What are DB, DC and IRP retirement pensions?
- A system that protects benefit rights by funding them outside the company
- The company bears the investment outcome under DB; the employee bears it under DC
- Adopting or changing a plan requires employee representative consent
The moment you choose a plan, what changes on the company’s books is the nature of the retirement benefit liability. If you keep DB, the company must contribute more when investment returns fall short of the promised benefit, and cash leaves all at once in years when many employees retire. If you switch to DC, that year’s obligation is settled when the contribution is paid, which makes annual labor cost forecasting simpler, but investment gains and losses stay in the employee’s account. Choosing a plan type is not a contest over returns. It is a decision about who bears the risk, and the starting point for that decision is your pay structure and retirement age profile.
The operating rules differ as well. With DC, the employer must pay in at least one-twelfth of each participant’s annual total wages at least once a year by the set date. If it misses the deadline, late interest accrues at 10% per year, rising to 20% per year after a certain period. With DB, the plan is regularly tested for whether it meets the minimum funding ratio against the standard liability reserve. If it falls short, the financial institution notifies the employee representative, and the employer must draw up a plan to close the gap. Early withdrawals differ too. DC allows withdrawals only for statutory reasons, such as buying a first home or medical care lasting six months or more. DB generally does not allow them.
An IRP is both the channel that severance benefits pass through and an account where individuals can save more for retirement. As a rule, severance benefits are transferred into an IRP account, with exceptions such as retiring at age 55 or later or receiving only a small amount. Employees can also make additional contributions while still employed, and combined with pension savings they can claim a tax credit of up to KRW 9 million (≈ US$6,730) per year, so it is an option a company can recommend to employees without spending any separate employee benefits budget. However, canceling early means repaying the tax credit already received, so employees who expect to need a lump sum soon should be told this as well.
The most common misconception in practice is that “switching to DC ends the company’s burden.” Under a seniority-based pay system where wage increases outpace investment returns, a DC switch can disadvantage employees, so it requires a consent process on par with an adverse change, and a consent form signed without explanation can come back years later as a dispute over its validity. Conversely, if you move to a wage peak system while leaving DB untouched, the average wage just before retirement drops and severance benefits shrink, and the complaints of employees who reach retirement age with no action taken ultimately land on the HR team. Requirements may be amended, so check the latest laws and your financial institution’s guidance.
Hwi KimCEO of HRDIST & Talent Development Systems Consultant
Inwoo LeeExpert in Leadership, Communication & Performance ManagementUnder the Employee Retirement Benefit Security Act, retirement pension plans protect employees’ right to benefits by holding severance pay outside the company. The Act defines several plan types, including defined benefit, defined contribution, and individual retirement pension plans.
Company A makes auto parts in southern Gyeonggi Province, with 210 employees and annual revenue of KRW 48 billion (≈ US$35,912,000). Since its founding, it has run everyone on a Defined Benefit (DB) plan, but with average tenure now past 11 years and a wage peak system planned in two years, severance costs were set to bunch up in a single period. (Hypothetical example)
- When the HR manager pulled up the funding status, the DB funding ratio was only 82%, and 34 employees would reach retirement age within five years. The CFO asked, ’First, show me how much cash goes out in which year.’
- A simulation run with the labor attorney showed that if a wage peak system took effect in two years, the retirement benefit for a production worker with 20 years of service would drop by about KRW 14 million (≈ US$10,500) per person.
- At the briefing, a union member in his late 40s demanded, “Who’s responsible if the principal loses value?” and the HR manager put forward a compromise: switch only those about to enter the wage peak to DC, and let everyone else choose.
- After three rounds of negotiation with the union chair, they agreed to settle service before the conversion date on a DB basis and transfer it to IRPs. They then collected signed consent from a majority of union members and amended the retirement pension plan rules.
- Six months after the switch, 128 of the 210 employees (61%) had chosen DC, the DB funding ratio rose from 82% to 100%, and the forecast error on annual severance contributions narrowed to within ±3%.