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Retirement fund transfers – Short-term pain vs. Long-term gain

04 August 2015 Steven Nathan, 10X Investments
Steven Nathan, CEO of 10X Investments.

Steven Nathan, CEO of 10X Investments.

To change or not to change the fund administrator - this is one of the biggest decisions that Trustees of a stand-alone or umbrella retirement fund will face, usually after a period of poor service or performance.

According to Steven Nathan, CEO of 10X Investments, changing the fund administrator presents risks and challenges, but the potential long-term benefits can far outweigh the risks. “Saving for retirement is a long-term endeavour. Employers and Trustees have a fiduciary duty to act in the employees’ best interests – they must therefore assess the near-term risks against the long-term reward that such a switch can deliver.”

Nathan points out that Section 14 transfers - a reference to Section 14 of the Pension Funds Act governing the transfer of assets between fund administrators - have a reputations for being complicated, drawn-out and costly affairs. “This increases the pressure on the employer and trustees to act wisely, to select an administrator whose products and services meet member requirements, to be on top of the financial implications of the process, as well as to ensure a smooth transfer.”

Nathan says that while the efficiency of the transfer is largely dependent upon the quality of the transferring administrator and the state of the transferring fund, the administrators of the new fund can play a significant role in ensuring a smooth process.

Although a Section 14 transfer should not be entered into lightly, there are grounds that justify the move, despite the inconvenience.

Improved administration

For most fund members, their retirement fund is their single, largest financial asset. Little wonder then that employees get anxious if they must contend with poor communication, clerical errors and unresponsive staff. “This destroys the trust in our savings system,” says Nathan. “The administrator must be able to provide accurate fund values, deliver clear and comprehensive member communication, and process member contributions and benefit payments in a simple and efficient manner. These are critical components for a well-managed retirement fund.”

Lower fees

High fees have a massive impact on the long-term savings outcome – over 40 years, every 1% in fees saved (for investment and administration) can sustain an investor’s retirement income level for an additional 12 years. “Fund members should never pay total fees of more than 1.0% pa of their investment balance,” says Nathan. “If they do, it can derail their retirement. The onus is then on trustees to find a lower-cost provider that charges lower administration fees and offers less expensive investment options. While fees are inevitable, some can be avoided, negotiated or minimised.”

A solutions-based approach

These days, many administrators offer fund members investment choice, allowing them to select from a range of funds and asset managers, and to make regular switches, supposedly to ‘satisfy their specific needs and risk appetite’. According to Nathan, however, most fund members are unable to make informed decisions, or understand their needs. For them, this choice is a cost that manifests in higher administration charges, advice fees, sub-optimal investment decisions and emotional switching.

“Fund members should invest according to their investment time horizon, not according to their individual risk tolerance or the latest performance rankings,” says Nathan. “We believe that this is the most risk-appropriate way to allocate savings between the different investment classes (shares, bonds and cash).”

This happens by default if the administrator automatically invests members in a life-stage solution. “This protects them from choosing a sub-optimal portfolio, and from emotional switching. It is likely to improve their savings outcome dramatically,” says Nathan.

A passive investment style

Most fund administrators advocate an active management investment style, on the premise that this can deliver an above-average return. But historically, only one in five fund managers has done so, after fees, says Nathan. This exposes the fund member to significant manager selection risk, and a sub-optimal savings outcome as a result of earning a below-average return.

“An active management style costs more, but only a minority of investors benefit from higher returns. The great majority would have been better off simply collecting the average market return at low cost,” says Nathan. “In the context of a 40-year savings term, employers and trustees must ask themselves whether the administrator’s fund selection really serves the best interest of employees. If not, they should consider a move to an administrator who is a passive investment advocate.”

“So yes, the administration hassle of a section 14 transfer can be offset by significant, enduring rewards. Choosing a fund that offers reliable and efficient administration, that saves on administration and advice fees, and that provides risk-appropriate portfolios for all fund members, can result in long-term benefits that significantly outweigh the initial transfer headaches,” concludes Nathan.

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