Employer? Understand your fiduciary duties when it comes to staff retirement options

18 March 2019 Allan Gray
Allan Gray’s Saleem Sonday

Allan Gray’s Saleem Sonday

More employers are turning to umbrella funds to help provide their employees with retirement benefits. But even though umbrella funds relieve employers of much of the administrative burden of running a retirement fund, employers still owe a fiduciary duty to their employees, says Allan Gray’s Saleem Sonday.

In the past, where employers provided retirement benefits to employees this was typically done through a standalone fund administered by employees acting as trustees. However, today many employers are opting to use an umbrella fund, a retirement fund open to multiple participating employers. This change has been driven primarily by the regulatory complexity and associated costs of running your own fund.

“While as an employer you may take advantage of the ease of administration and lower costs that are often provided by umbrella funds, it is important to remember that you are not relieved of your fiduciary duties. Ultimately you remain responsible for the best interests of your employees,” asserts Saleem Sonday, head of group savings and investments at Allan Gray.

The term “fiduciary” refers to a person who holds a position of trust, whether in a legal or ethical sense. “In the context of a retirement fund, the purpose of a fiduciary duty is to protect the financial interests of the members and beneficiaries,” says Sonday. In terms of common law, a fiduciary duty exists where there is scope for power to be used in a way that affects the interests of beneficiaries and those beneficiaries are vulnerable.

The fiduciary duties of the trustees of retirement funds are well established in terms of the common law and have also been specifically provided for the Pension Funds Act, which states that the trustees have a duty to members and beneficiaries, as well as a duty to the fund, to ensure that the fund is financially sound and is responsibly managed and governed.

An employer’s duties regarding retirement funds are also set out in the Pension Fund Act, which states that employers must make sure that contributions are paid to the fund in full and on time. But employers’ common-law responsibilities are not always understood.

“If you apply common law thinking, in our view it is clear that as an employer you have a fiduciary duty to protect the financial interests of your employees,” says Sonday. His rationale is summarised as follows:

1. Members of occupational funds have little to no control over their employee benefits. As an employer you decide whether or not you will provide employee benefits, which provider to invest with, how contributions are to be invested, which adviser/consultant to engage with and, often, the rate of the members’ contributions. Members agree to contribute to a retirement fund in terms of their employment contracts and most are not in a position to negotiate these terms.
2. In standalone funds, the Pension Funds Act requires that at least half of the board must comprise of member-elected trustees. However, umbrella funds are usually exempt from this requirement and their boards comprise mostly of professional trustees who are appointed by a commercial sponsor and who have no personal relationship with the members.
3. Employees often have limited understanding of retirement products, their benefits and the fees that they pay for management, administration and advice. They are often not consulted on how or where their hard-earned money is invested and have little or no say at all in fee negotiations. Fees are often perceived to be excessive relative to investment growth.

“The decisions you make have a direct impact on the member’s retirement benefits and it could be argued that members are vulnerable, as they have little-to-no opportunity to engage with or object to these decisions. For this reason, it is your ongoing fiduciary duty to act in the best interest of members and to exercise a duty of care,” he says.

Sonday offers four practical actions to take in fulfilling your fiduciary duties:

1. Conduct an appropriate due diligence into the preferred umbrella fund before you agree to participate. This should include a review of the governance, service, administration capability and costs of those funds, to ensure that members will receive good service and value for money.
2. Assess the appropriateness and cost-effectiveness of the investment arrangements in light of the profile of your employees and, carefully consider the default investment portfolios offered by the Fund.
3. Ensure that adequate and appropriate communication is provided to members so that members understand the benefits and costs associated with the fund. In addition, ensure that there is adequate ongoing member communication and engagement around overall fund performance and appropriateness.
4. Once you have started participating in the umbrella fund, it is important to periodically reassesses your chosen product provider, the governance of the fund, the costs being deducted from employee contributions and benefits, the default investment portfolio you have selected and, where applicable, the fees and services of your appointed adviser.

“If you are not in a position to carry out the above process on your own, consider appointing an adviser or consultant to assist with the above process and/or to provide advice and intermediary services to help you make a more informed decision. In this instance, it is important to maintain an appropriate level of oversight to ensure that due care is taken in all decisions made on behalf of your employees,” Sonday concludes.

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