Focus on investment returns, costs and transparency when selecting default investment strategies

Employers face many complex decisions when choosing retirement fund solutions for their employees. But selecting an appropriate default investment strategy is probably the most critical, because an overwhelming number of fund members end up invested in it. Employers should focus on investment returns, cost and transparency.

This was one of the key takeouts to emerge from the “Choosing a default” panel discussion moderated by Duncan Theron, CEO of GraySwan Investments, during the recent, inaugural Allan Gray Retirement Benefits Conference. A default investment strategy determines the investment portfolio that a retirement fund member must be invested in, assuming they do not make a specific investment choice.

“A very small percentage of members opt out, making the choice of default investment strategy absolutely critical,” said Tomi Kulcsar, partner and head of Investments at Mosaic Investment Consultants.

So, what should employers consider when choosing a default investment strategy?

“A good understanding of the provider’s track record, and the types of fees that are charged, can be key to helping you make the right decision for your employees,” notes Saleem Sonday, head of Group Savings and Investments at Allan Gray, speaking ahead of the conference.

The panellists agreed with this sentiment.

“Investment returns, a critical component of sustainable retirement outcomes, are entirely dependent on the investment strategy,” noted Solly Tsie, principal investment consultant at Simeka Consultants and Actuaries.

Tsie added that ongoing open and transparent communication to fund members is necessary to ensure they understand what they are investing in and where they are on their retirement journeys.

Meanwhile, Kulcsar warned of the trade-off between fees and performance. “The regulators require that a default investment strategy must have reasonable costs and be free of complex fee structures,” he said.

The panel encouraged employers to be clear on their investment management style preferences and appreciate the impact this would have on fees and the risk/return balance within the funds’ investment portfolios. Employers should also enter discussions with a clear view on alternative assets and environmental, social and governance (ESG) investing, among other emerging trends.

Against this backdrop of complexity, the role of a trusted investment adviser is key. “Employers must make sure that they get the right advice to guide and educate them,” said Kulcsar.

Sonday added that as only 6% of South Africans can afford to retire, employers play a key role in getting more South Africans actively engaged with their retirement savings, which will help move the needle on our dire savings rate.

“To get employees more engaged, I would encourage employers to offer simple products that offer value for money.”

He said that COVID-19 has added another complex lens to retirement savings.

“The pandemic has, more than ever, spotlighted the need for employer-assisted savings, as well as the fact that very few people are prepared to weather the storm in the face of a crisis. The same can be said for retirement; it always seems like something very far in the future, but it is the action we take now that will give us a better chance of achieving the goal of retiring comfortably. It is now more than ever that we need to focus on the things that really matter – like planning for a dignified retirement,” concluded Sonday.