• Michelle Acton

The do's and don'ts of moving to an umbrella fund

What is an umbrella fund? What types of umbrella funds are there? Here’s what you need to know, what to do and not to do when you’ve decided your company will make the shift from standalone to umbrella fund.

What an umbrella fund is and does

An umbrella fund differs from a standalone fund and the difference is simple: a standalone fund serves one company while an umbrella fund serves many within one structure. This means umbrella funds can work well for companies that aren’t quite large enough to extract scale benefits from a standalone; they do bring benefits to companies of larger scales too. Cost saving is one of the key reasons companies are increasingly choosing umbrella funds over managing employees’ retirement savings themselves. But before making the move, it’s wise to fully assess the merits for and impact on employee retirement savings by looking into the various umbrella funds’ benefits, fees, charges and other costs. Principal consultant at Old Mutual Corporate Consultants, Michelle Acton, says there are a couple of considerations to keep in mind to ensure you choose the best and right type of umbrella fund for your business. ‘A good decision that makes sense for members is always a fine balance between quality of service, flexibility of options and cost,’ says Acton. ‘It’s imperative the employer gains a thorough understanding of the services being offered, along with their associated costs. This is to ensure they get value for money and that the solution they select has the best chance of delivering the maximum retirement benefits for all of their members.’

Understanding umbrella funds

There are two types of umbrella funds, and each has a distinct structure.

Type A

* Managed by an independent management board. * General rules can be set up at fund level to guide benefit structures, investments, etc, but each employer decides on their own benefit structure within these guidelines, which are usually recorded in special rules for the employer’s sub-fund. * Administration, accounting and actuarial services take place at the main fund level and are usually provided by the sponsor.

Type B

* Main rules set up at the fund level and outline the benefit structure for all participating employees. * All participating employees are linked in some way – such as at industry or union level. Only employers who are eligible due to such links can participate. * Fund rules clearly outline how trustees are appointed and elected to ensure members and employees are well represented.

Take cover

If you’ve decided to make the switch from a standalone to umbrella fund, here are two important guidelines to bear in mind:

1. Do… Consider customising your fund.

In order to maximise member retirement outcomes, you might find it beneficial to combine two or more types of charging methods in an umbrella fund structure. This customisation will allow flexibility that meets the needs of various members. ‘A fund with a mixture of low- and high-income earners might choose to have a fee as a percentage of payroll with higher earners effectively cross-subsidising lower-income earners – this is quite common in South African umbrella funds,’ says Acton. ‘While charging a fixed rand fee per member per month is generally quite benign in terms of impact on retirement savings, the fees charged as a percentage of payroll are helpful to avoid lower-income members from carrying a relatively heavier burden in terms of fees.’

2. Don’t… Presume the lowest fee is the best option.

While costs do matter, it’s not as easy as just choosing the lowest or simplest fee. Remember that some fees are more transparent than others. So you must dig into the detail of each fee and look into what fees might not be disclosed, such as investment management fees, advises Acton. ‘Employers need to tread carefully when assessing fees and doing comparisons, as cheap is not always best. Rather select the fund that best suits the company and benefit structures, and provides the best chance of achieving the long-term objectives of employees.’


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