Comparison of retirement fund costs: challenges faced by decision-makers
New standardised disclosure measures will expose hidden costs and fees in retirement fund products
Layers of fees and costs in the retirement fund industry, combined with a lack of standardised disclosure, have left employers and trustees struggling to compare products in this market.
The new Association for Savings and Investment South Africa (Asisa) standard on fee disclosure for retirement funds is aimed at improving transparency across the entire retirement industry.
Quaniet Richards, head of institutional at Nedgroup Investments, says the new Asisa Retirement Savings Cost Disclosure standard will require retirement charges to be reflected across four components over various investment periods: investment management charges; advice charges; administration charges; and “other charges”, including regulatory, compliance and governance costs.
“This is a welcome development in an industry that has been plagued with opaque fee structures and we fully support this implementation next year. It will make the analysis of fees and costs associated with retirement funds on umbrella funds much simpler and essentially enable employers to realistically compare apples with apples before making a decision,” says Richards.
He says administration costs are poorly disclosed and often complex – especially when it comes to comparing different umbrella-fund fee structures.
“Although a range of retirement funds set up independently could enjoy the benefit of economies of scale due to lower investment management charges from the underlying asset managers, other kinds of costs such as performance fees of the underlying asset managers often result in higher total investment charges for the member.”
A disconnect between cost saving and what members experience often results in exchange-traded fund (ETF) structures. Although these products can appear attractive from a fees point of view, Richards urges employers and trustees to be mindful of the associated risks and costs before making a decision.
“Without clear rules and the benefit of scale, it is likely that investors open themselves up to implementation risk and higher transactional costs when structuring multi-asset passive solutions. This detracts from performance and, in some cases, increases volatility,” says Richards.
Simply by investing in the shareholder weighted all-share index and the South African real estate investment trust ETF, members’ exposure to property would automatically increase, where they would have been negatively affected by the recent property sell-off, he say
Richards urges employers and trustees to better understand the total costs associated with ETFs and the implementation risk of creating a multi-asset passive portfolio.
“Even a small saving on fees can make a dramatic difference to members’ overall retirement savings. We urge all employers and trustees to remain informed about these new requirements – and to make sure that they are aware of all of the costs associated with the retirement solutions that they are considering before making a final decision,” he says.
This article was paid for by Nedgroup Investments.