The ins and outs of fees and funds

Jeanette Marais, Director of Distribution and Client Service at Allan Gray

Decisions around retirement saving solutions need to be holistic, with costs being one of the important elements to consider, alongside return potential and softer aspects like service and communication.

It is critical that investors are well looked after: they deserve value for money and complete transparency – particularly around fees.

Value-for-money comparisons
While retail investment products such as unit trusts, have well-defined disclosure standards, cost comparisons in the group savings space are more difficult.

The way fees are disclosed varies from one provider to the next, as does the level of fee disclosure. This can make decision-making extremely challenging and often leads to inertia as employers struggle to settle on a solution.

Retirement fund providers tend to charge fees either as a fixed rand cost per member per month, percentage of payroll or percentage of assets under management.

A good, independent financial adviser can help an employer get an accurate picture on costs and conduct a proper comparison to find a product that is best suited to their business and their employees.

While corporate retirement schemes have traditionally been the territory of occupational pension funds and asset consultants, advising on umbrella funds opens up doors for independent financial advisers looking to diversify their businesses and build long term client relationships.

Over the last four years, the market share of commercial umbrella funds has increased by 7%, at the expense of standalone employer funds. While the large life companies have benefited from the move into umbrella funds from standalone employer funds, cost and complexity have dogged the industry.

Four common fee types
Often products are expensive and difficult to understand. Therefore bringing a product to the market that is simple, transparent and cost-effective is important. Added to that, costs have a significant impact on the value of retirement savings over time.

There are four common types of fees that apply to a member of a retirement fund:

1. An administration fee - This fee is charged to administer and invest members’ monthly contributions. It is usually expressed as a percentage of a member’s salary, and is deducted from their monthly retirement contribution.
2. An investment management fee - This fee is charged for managing a member’s retirement investments and is levied as a percentage of the member’s assets in that portfolio. The actual fee percentage will vary depending on the underlying investment portfolio(s) selected, as different investment managers charge different fees.
3. An adviser/consultant fee (only if an adviser is appointed) - This fee has to be agreed between the employer and adviser. It can be charged either as a percentage of contributions, or as a percentage of assets, or a combination of both.
4. A fee for risk benefits -This fee is charged to access risk benefits, such as life cover, disability and/or income protection benefits.

The hidden truth
The problem is that different providers slice and dice their fees differently, and when you try to make comparisons, you are not comparing apples with apples. Without advice, employers may choose to go with the cheapest provider at face value, only to realise further down the line they did not have all the information at their disposal.

Charge shifting makes fees difficult to compare. Sometimes you will be undercharged on one fee component, such as administration, but overcharged on another, such as investment management. It is therefore important to look at the total fee when comparing different providers.

Members deserve simplicity, fee transparency and a choice of investment managers, at no extra cost.

It is important for employers to understand exactly what they are paying for and it is critical that they get value for money. Umbrella fund members deserve to get the most out of their retirement savings through better communication from their providers, and access to the same information provided to individual investors. They also deserve choice and access to advice. Therein lays an additional opportunity for independent advisers.