Dispelling umbrella fund fears for employers

Mica Townsend, Specialist in the Group Savings and Investments team at Allan Gray

There has been a drive from single employer standalone funds to multi-employer umbrella funds, with the number of standalone funds dropping significantly from 774 in 2015 to 398 in 2022. The shift has largely been driven by the authorities to encourage consolidation within the industry to reduce costs and improve the service offering, as well as by employers to simplify the regulatory burdens of operating a retirement fund. Below we dispel some of the fears employers may have in moving to an umbrella fund.

1. Employers can have control and oversight

One of the most common concerns for employers around moving to an umbrella fund is the perceived loss of control and lack of transparency compared to a standalone fund. While the responsibilities and potential liabilities incurred in managing the fund move from the employer to the underlying umbrella fund administrator, the employer can still be involved.

Regular engagement will take place at an operational and administrative level. Employers can also engage their fund administrator by forming a management committee made up of both employer and employee members, who will represent the interests of the company and be the voice of all members (similar to a board of trustees). The administrator will have regular engagement and feedback sessions with this committee to ensure the fund is working as effectively as it can and that there is an open channel for communication.

2. Connecting trustees to members and preserving best interests

Many employers worry that by exiting a standalone structure, the trustees will be disconnected from the needs of the members. Employers can still be connected via a management committee, and a good administrator will want to work closely with the employer to ensure members are getting the most benefit from the fund.

3. Employers have optionality

Being removed from important decisions is another fear of many employers. Although the trustees of the umbrella fund hold the overall decision-making function for the fund, employers have ownership over a wide range of choices. These include:

• Default investment options
• Contribution percentage levels
• Eligibility requirements
• Retirement age
• Risk benefits

The default investment option is arguably the most critical decision to make on behalf of employees. As always, it is wise to look at the finer details before settling on the provider.

4. Transfer processes need not be onerous

Transferring from one group retirement structure to another is a highly regulated process that can be lengthy, and some employers worry about the additional admin. During this time, nothing really changes regarding the member’s day-to-day experience. With the right administrator, the process does not have to be painful. Communication, engagement and accountability are key for a successful transfer, and a skilled administrator will have a good team in place to handle this.

Reviewing decisions

Employers must remain committed to fulfilling their fiduciary duty by providing employees with the most appropriate retirement solution. In addition, employers need to be confident that they are making the best decision, whether or not they move to an umbrella fund. It is important to carry out critical reviews at regular intervals, as what may have been the best decision five years ago may no longer be the one that makes the most sense today.