Stand-alone vs umbrella funds: Three factors to consider

The decision on whether or when to move your organisation from a stand-alone retirement fund to an umbrella fund is not a simple one, but it’s a decision every business must at least consider as it fulfils its promise to act in the best interests of its employees’ financial futures.

“There’s a lot of noise in the market about this,” says Malusi Ndlovu, director of large enterprises at Old Mutual Corporate. “The National Treasury has made its position clear: it’s pushing for consolidation, which means a move towards fewer, well-governed funds.”

The issue was discussed at Old Mutual Corporate’s recent webinar, The Great Debate: Standalone vs Umbrella Retirement Funds. During the panel discussion, three factors emerged that employers should consider when comparing the two fund types.

FLEXIBILITY

“The employer needs to assess how much flexibility they want, and why they want that flexibility,” said Estelle Midgley, an independent principal officer with experience in large corporate funds, who has been involved in moving from a stand-alone to umbrella fund. “Through that, you look at the products and who provides those products.”

Flexibility is, of course, linked to control, and employers sometimes fear losing control over the important aspects of the retirement fund when moving to an umbrella fund, or having to pay excessive costs to get the flexibility they want or need.

She advised employers to see whether they are locked into the sponsor’s products. ‘If you are, where does the flexibility come in? Where does the cost saving come in? And you might start with a cheap deal, but as time goes on those products might escalate in costs.’

COSTS

Ultimately, retirement funds exist to maximise employees’ retirement outcomes. That’s why the money spent (or saved) in a stand-alone compared with an umbrella fund is such an important factor. 

Midgley highlighted the importance of knowing what all the most important costs are. “By far, it’s the investment cost, which includes asset management fees, trading costs, investment consulting fees, and so on. Employers should ensure they have a breakdown of those costs when they compare their options.”

“Investment management charges are usually based on the size of the fund’s invested assets,” said Ndlovu. “With umbrella funds having greater assets, the reduced costs could be carried over to the members. Then there’s what we call the management governance budget, which is the time required to manage the fund. Given that a stand-alone fund’s trustees tend to be company employees, moving to an umbrella fund will free them up to do their primary job — in other words, to spend time on activities that will grow your core business.”

Other costs include communication, particularly risk costs. Because the cost of death and disability benefits increase over time, it’s important to do a price comparison every year to make sure you are still getting the best deal.

SERVICE PROVIDERS

The reason employers should look so closely at costs is to ensure they are comparing like for like, they know what is not included in the cost and which service providers they’d be locked into.

One locked-in cost is the fees of the umbrella fund’s management board (trustees) and its various subcommittees. “A lot of the work really is done by the subcommittees,’ Midgley said. “So you need the subcommittees to be strong.”

“Stand-alone and umbrella funds have the same level of governance requirements, which means that both sets of trustees have the same legal liability,” said Ndlovu. “But a stand-alone fund usually does not have professional trustees, since they tend to be company employees. If that is the case, the question then becomes whether they’re able to stay up to date with the latest legislative requirements. Are they qualified to make the right decisions about investments? You can outsource those responsibilities, but you can’t abdicate them.”

For more information, visit the Old Mutual website or email mindspace@oldmutual.com. 

This article was paid for by Old Mutual.