When it comes to daily costs such as food, petrol, school fees and data bundles, most people are able to recall exactly, often to the cent, how much each item costs them. However, when it comes to understanding the costs that they are paying for their retirement fund, South African employers and members alike seem to have an alarmingly low awareness.
This is according to Quaniet Richards, Head of Institutional at Nedgroup Investments, who says complex and opaque fee structures of the past, and a generally low engagement amongst members when it comes to keeping track of their retirement fund information and statements is propagating the trend of low awareness amongst investors.
“Retirement Fund Reform has been introduced by Treasury to improve governance, reduce costs and improve fee disclosure. These are very encouraging steps towards making saving and investing easier for South Africans – however we still find that members are unaware of the cost of their retirement savings and the industry needs to address this urgently,” he says.
The Draft Default Fund regulations, released in September 2017, set out that retirement funds will need to offer members a default investment portfolio, default preservation and portability and a pre-selected annuity strategy.
“This regulation will make it even more crucial that employers and members alike examine their fee structures and ask the important questions of their service providers. Over 40 years of saving for retirement, costs of even a fraction of one percent can dramatically undermine the likelihood of members retiring financially secure so it’s crucial to ensure that the solution they choose is the best option for the employer and the members,” says Richards.
Richards also points to the increasing demand to incorporate passive solutions in retirement solutions in an effort to manage costs. He says this is an area of confusion when it comes to fees.
“Not all low-cost passive solutions are equal – and cheaper is not necessarily better. More and more cases are emerging where fees disclosure is misleading or inaccurate – and often headline fees or charges do not reconcile with the total investment charges. This is because underlying charges are being charged that aren’t disclosed,” he says.
So what can members do?
Ask the questions, says Richards. “Investors should push their service provider to walk them through all of the costs and make sure there is a clear explanation for each fee and that each fee is also clearly displayed on the relevant documentation. These fees should be clear and totally inclusive.”
Richards stresses that the following fees should be clearly displayed for retirement fund members:
Retirement Fund/Umbrella Fund administration fee: This is paid to the administrator of the fund for performing functions such as the record keeping of member’s contributions, investments and payments.
Annual Investment fee: This is the fee charged by the service provider to invest your money. The investment or asset management costs are charged as a percentage of the amount you have invested – referred to as a percentage of your “assets under management”.
Total Expense Ratio: Unit trust funds quote asset management and other fees deducted within the fund, such as bank charges, audit fees, taxes and custodian fees. All of these costs are charges as a total expense ratio (TER).
Total Investment Charge: This fee includes all the fees in the TER and the costs of trading the shares, bonds or other securities in the fund. These costs include brokerage, security transfer tax and investor protection levies.
Advice/Broker fee: This is the fee paid by the member for financial advice to a financial planner. This fee may not be applicable to all retirement funds or members.
Richards says over and above costs and fees, investors should assess several factors and features to determine which fund will best enable their employees to save adequately for retirement.