As the obligations for trustees to select the most appropriate retirement solution for their members grows more onerous, it is crucial to weigh up the long-term impact for total fees along with other important features to assess a good retirement solution.
This is according to Quaniet Richards, Head of Institutional at Nedgroup Investments who is passionate about addressing the confusion around retirement fund fees and educating investors about the long-term impact of certain retirement fund decisions. Richards describes the three important elements to consider when selecting a retirement solution:
“The most important thing to be aware of is the overall impact of all fees related to a retirement fund solution. Paying just 1% more for a retirement solution can have a massive impact when compounded over the years leading up to a member’s retirement and can eat away almost half of your investment in 40 years,” he says.
For example, when we look at the impact of total investment fees, a member who earned R1 million would retire with 59% of their annual salary due to the effect of the fees over time, based on a total investment fee of 1.5% per annum and achieving inflation plus 5%. On the other hand, the same investor earning the same salary of R1 million and staying invested under the same conditions for the same amount of time, would retire with 80% of their salary by investing in a retirement solution that has a total investment fee of 0.5%.
According to Richards, in response to Treasury’s research into high fees in the retirement industry, the retirement industry became very focussed on reducing fees and preparing for future regulation. For example, Nedbank, in partnership with Old Mutual spent years developing the Nedbank Retirement Solution which takes all of the upcoming regulation into account and incorporates life-staging and passive investments intended to create one of the lowest-cost solutions in the industry.
“As a result of this kind of innovation, Richards says there are some excellent retirement solutions available for members. The key, however, is to be able to cut through the noise and identify the total costs of each product as the disclosure of fees can still be quite opaque and members can easily overlook the impact of additional fees,” he says.
Another important consideration is whether or not a retirement solution incorporates life-staging.
“Being able to adjust the structure of a member’s retirement fund investments as they get closer to retirement ensures that the member is positioned in investments that are most suitable to their desired retirement outcome and not at risk of suffering losses the closer they are to retirement,” says Richards.
Member guidance and default options
Layers of new regulation introduced since 2007 have added complexity and pressure for trustees when it comes to providing appropriate default options for members – as well as qualified guidance for members. It is therefore crucial that trustees consider the default options and support structures for members before making a decision about a retirement solution.
Richards says in anticipation of the drive towards lower costs and more transparency in retirement solutions, Nedgroup Investments launched two multi-asset passive funds in 2007. These have been incorporated into the retirement solution providing effective cost control and life-staging benefits for members affording members the opportunity to retire with 80% of their final salary.
“Being the largest provider of low-cost multi-asset solutions enable us to drive costs down significantly. Furthermore, through the partnership with Old Mutual Superfund, we have a default preservation and default living annuity built into the retirement solution and advice available for members at no additional charge,” says Richards.
“Having considered these factors it is always important to weigh it all up in the context of the fees being charged for the products and the impact that those fees will have on the member’s overall retirement outcome. It is possible to find a solution that provides all of these benefits without onerous fees – but it is also possible to overlook hidden costs along the way if one just focuses on the benefits,” says Richards.