Reducing costs for smaller funds

The retirement administration industry does have the capability to minimise yield reduction for members by bringing down the cost of administration. The question is: does it have the will?

Metropolitan Employee Benefits recently conducted a study focussing on the needs of retirement funds, with a majority of independent brokers revealing that trustees felt they weren't getting value for money, while at the same time they were questioning the reliability of administration systems and processes.

"Addressing this issue requires getting back to the basics of retirement administration, particularly for smaller retirement funds with between 100 to 5000 members," says Wehann Smith, Manager for retirement technical support at Metropolitan Employee Benefits, which recently launched new administration platform for the retirement fund industry called Neon.

Yield reductions

Considering that an acceptable real return for a person working for 30 to 40 years is about 5%, and that smaller retirement funds using retail investment products could be paying 2,5% per annum in costs, investors' yield reduction is huge. This also underscores why so few people can maintain their standard of living even after making provision for retirement for 30 – 40 years.

The problem of yield reduction is compounded for smaller funds who often do not know what they are paying or what they are paying for, and by poor governance standards.

New industry standards

"What clients are asking for involves setting new industry standards in reporting and fee transparency, while at the same time reducing yield reduction to members," explains Smith.

"To achieve this, you essentially need a management team structured to ensure strong financial controllership. This ensures that while one team delivers on the basics in terms of meeting Service Level Agreement turnaround times, a financial controllership team focuses on managing risk."

Most administrators only provide financial information about the fund quarterly or even annually. "This is no longer sufficient in a rapidly changing world in which consumers expect to access updated information at the click of a button. Trustees and fund members should have access to fund information anytime, anywhere," adds Smith. "This access can be provided cost-effectively through a web-based portal."

Reducing costs

Currently, an increasing number of retirement products are aiming to provide greater flexibility and investment choices to their clients, even though less than 15% of members of funds that offer individual member choice choose investment options other than the default option.

Funds that offer individual member choice are more expensive due to the greater amount of administration required, switching fees and the administration relating to the larger number of investment portfolios offered.

A novel solution to reduce the cost of administration to members is a split fee structure in which members are charged a set administrative fee, while only members who opt for the individual member choice product range are charged accordingly.

Considering that 85% of fund members in SA do not deviate from the trustee-selected default investment option, the split fee structure splits fees according to member needs without any cross-subsidisation.

Suite of risk benefits

Since a one-stop shop approach is not desirable, funds should not be compelled to utilise a suite of risk benefits. This will encourage trustees to choose retirement fund administrators based on administrative capabilities and transparent costs.