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Artificial intelligence (AI) is poised to transform the retirement funds market, with its full-scale commercialization set to begin this year, according to industry officials Thursday.

Koscom, an IT system provider owned by the Korea Exchange, in October last year initiated a verification process for the AI algorithms of financial institutions for retirement funds. After just an eight month evaluation, the results were announced in June.

A total of 206 algorithms passed the review: 33 from securities firms, 78 from asset management companies and 95 from investment advisory and discretionary management firms.

These companies can now apply for designation as "innovation financial services" at Fintech Center Korea starting in September. Currently, AI is restricted to suggesting portfolios rather than directly investing. However, once designated, these companies will be able to sell AI-driven pension products online from Dec. 11.

The so-called robo-advisors, operated based on AI algorithms, would adjust investment portfolios and determine the timing of buying and selling according to predefined roles.

This technological advancement has attracted significant interest from the financial industry as the aging population drives the growth of the retirement funds market.

As of the first quarter of 2024, assets accumulated in retirement funds totaled 386 trillion won ($279.4 billion), a 14 percent increase from the same period last year. This rapid growth suggests the amount could exceed 400 trillion won within the year.

"It's currently in sandbox form, but once fully permitted and extended to existing subscriptions, we anticipate a significant market impact. Especially if Generation MZ (a Korean term referring to millennials and Gen Zers) — familiar with online investments — enters the retirement funds market, demand is expected to rise significantly," an industry official said.

Experts suggest that robo-advisors could be more suitable than human advisors for managing retirement funds, which aims to achieve long-term, stable profits. Until now, robo-advisors have not been very popular for short-term investments due to their inability to respond flexibly to rapidly changing market conditions.

"Algorithms of robo-advisors can manage stable returns unaffected by market conditions," Hana Institute of Finance noted in a report released in March.

"Domestically launched robo-advisors have a high allocation in safe assets like government bonds and a lower allocation in risky assets. Their returns tend to lag behind benchmarks during stock market upswings. However, during periods of increased uncertainty, they achieve favorable returns, ultimately delivering stable long-term performance," it added.

Another advantage is the very low cost of personalization. Until now, private bankers invested significant time and money to offer tailored investment products or strategies to match the preferences of customers. The automated system, meanwhile, would make optimization much easier.