Don’t be fooled by pension industry’s six myths

10X Investments is determined to alert investors to the six myths widely spread by the pension industry’s marketing machine. “Pension industry marketing tends to focus on what is possible, not what is probable,” explains 10X Investments CEO Steven Nath

Nathan’s goal is to strip reality from myth and provide retirement investors with clear, positive alternatives for their retirement savings.

Myth 1: Top fund managers reliably beat the market.

The rule of thumb for a secure retirement is to replace 60% of your income while still employed.

“To achieve that ratio, don’t be fooled by promises to beat the market,” says Nathan.

Despite the advertising claims, no-one reliably beats the market over the long-term, not even the top fund managers.

“The reality is that over twenty year periods, less than 1 in 10 fund managers beat the market after fees”, says Nathan.

Myth 2: You get what you pay for.

“Once you realise that beating the market is very unlikely, it follows that paying higher fees does not guarantee a higher return for investors,” says Nathan.

In fact, the opposite is often true. A US study by Morningstar in 2010 concluded that fees are the most dependable indicator of a mutual fund’s future performance. It found that the cheapest funds, as a group, produced higher total returns than the most expensive group. This finding held true over every time period and asset class.

“The reality is that you get what you don’t pay for”, says Nathan.

Myth 3: Costs don’t matter.

So paying higher fees doesn’t guarantee a more positive outcome, but does it have a negative impact?

“Yes, and it’s a negative impact that can be quite significant – even though the industry marketing never mentions it,” says Nathan.

“Say investors pay a fee of 3% pa - that’s the average in SA – and earn a 5% pa return after inflation. That means they are giving up 60% of their real investment return.”

In that scenario, investors give up half of the pension they could have earned with a low fee strategy.

Myth 4: Choice is good.

Nathan also cautions against excessive choice in retirement investments. Although the freedom to choose sounds appealing to investors, choice comes at a cost – but not necessarily a return.

“Choice sounds great in theory but in the real world, most retirement savers simply don’t have the insight or the will to construct their own portfolios,” explains Nathan.

“80% end up in the default portfolio. Yet everyone pays to have choice. The ones who profit are those who facilitate choice and offer commission-driven advice.”

Myth 5: The investor’s risk profile drives the investment strategy.

Individual risk profiles have a subjective and emotional basis, which is at odds with the rational objective of retirement investing. This can lead to excessive caution.

“All retirement investors ultimately have a common goal: to protect their standard of living in retirement,” explains Nathan.

“Under a traditional retirement saving plan, that outcome is improbable with a low-risk portfolio.”

The rational and objective approach is to base asset allocation decisions on the investor’s retirement date.

Myth 6: No news is good news.

Uninformed investors are more likely to swallow the industry’s myths, so Nathan urges investors to demand better disclosure and transparency from the pension industry as a whole.

“Investors need to know if their pension savings are on track before they reach their retirement date,” says Nathan.

“Full and fair disclosure would alert investors to a pension shortfall – and give them time to fix it.”