What if we said you could easily retire with 25% more in savings? What if we told you the system is designed so you don’t find out how to do this? People asking for advice on the ‘the best funds’ for retirement but not questioning the fees they’re paying have their heads buried in the sand.
The erosion high fees cause to retirement savings is well proven. As far back as 2013 National Treasury warned South Africans to pay attention to fees, reporting that if the fees incurred by a regular saver are reduced from 2.5% of assets to 0.5% of assets each year, he or she would receive a benefit 60% greater at retirement after 40 years.
Boosting retirement savings
When you put that into rands and cents, it’s a massive difference: instead of R1 million, you would retire with R1.6 million if you reduce fees by 2% of assets. Reducing fees is a guaranteed way of boosting your retirement savings.
While a 2% reduction may be ambitious, every bit makes a big difference. If you reduce fees by just 1% of assets, you will retire with 25% more savings. Or R1,250,000 instead of R1 million.
So why, with all these evidence-based warnings amplified by low-cost advocates like us, are South Africans still overlooking the damage wreaked by high fees?
Anecdotally, most people do not understand the power of compound interest, the effect of interest earned on interest previously earned, and especially not the de-compounding effect that fees have on their savings.
This is not surprising considering the world of savings and investment is (often purposefully) fraught with complexity, fine print and jargon, making it daunting and causing many to ‘blank out’ when it comes to fees. But, while fees are unavoidable, excessive fees are just like investment losses, whereas every rand saved in fees is a rand more towards your retirement.
So, here are simple tips that show how easy it is to save 1% in fees, and significantly boost your retirement outcome.
Interrogating your unit trust fees
Fees for unit trusts range in price from 0.40% to over 3% per annum. In practice this means that the higher priced unit trust would need to outperform the other by 2.6% per annum just to deliver the same after-fees return!
That is highly unlikely for unit trusts with similar risk-profiles. It could happen, but it’s a high risk gamble on the unlikely possibility of massive out-performance.
You should research all the unit trusts you own and establish what fees each carries. Most asset management companies have websites on which they publish the minimum disclosure document (MDD) or ‘fund fact sheet’ for each unit trust they offer.
By law, each MDD displays a Total Expense Ratio (TER). If that figure is higher than 1.5% per annum you are probably overpaying, and you should look for alternative, cheaper unit trusts. In most cases you will find unit trusts with the same risk profile for less than 0.50% per annum.
Switching from an expensive unit trust to a cheaper one is a no-brainer; it can immediately save 1% per annum or more. And, remember, that means a 25% higher savings pot over time.
Cutting out the middleman
Most unit trusts are available on Linked Investment Service Provider (LISP) platforms that bring together a wide choice of different unit trusts in one ‘supermarket’ (the LISP) for your convenience.
However, most charge a fee (around 0.5% per annum) for that convenience. Where possible, skip the LISP platform and invest directly with the asset management company unless your selected LISP platform does not charge a fee.
It’s as easy as calling the asset management company’s call centre for help and, while there will be a bit more administration involved, the minor inconvenience of receiving multiple quarterly reports instead of one consolidated report is worth the compound interest savings you will benefit from upon retirement.
Doing away with the extra wrapping costs
‘Savings wrappers’, like retirement annuities, living annuities, preservation funds and tax-free savings accounts, are available on most LISP platforms.
These wrappers are tax-friendly ways of saving and offer you a selection of unit trusts to invest in. But beware: a savings wrapper can represent a third layer of fees on top of the LISP administration fees and the unit trust fees.
To reduce fees, follow tip one, then look at the cost of the savings wrappers themselves. Because these products are fairly generic, you can shop around for the best deal.
Some platforms charge one fee, some charge a double fee, while others offer their wrappers for free (i.e. there are no additional fees for the savings wrapper or administration) if you invest in their unit trusts.
If you are paying more than 0.5% per annum for the administration and the savings product combined, you are paying too much. In which case, you can easily switch from one platform to another.
Seeking the right advice for your interests
Employing a certified financial advisor is sensible but bear in mind that there are two types of financial advisors: independents and agents representing financial services companies.
Independent advisors charge advisory fees, and these are negotiable. Whereas if you are using an advisor tied to an asset management company, you will pay commission for what amounts to ‘sales’. That may or may not be a good deal, depending on the product, but I would shop around to see what an independent advisor who has your best interests front of mind offers. Chances are you can shave off fees if you go independent.
If you do not have a huge amount of savings, consider using a robo-advisor, which offers simple investment guidance free-of-charge on a no-obligation basis (you should only pay the management fees for the fund you invest in, and not for the use of this algorithm-based digital tool).
If you are in formal employment, you are probably a member of a retirement fund sponsored by your employer or an umbrella fund selected by your employer.
For most people this is their largest ‘savings pot’, yet most employees simply toe the line and feel they don’t have any say over what their future is invested in. Yet you absolutely do have a say, and you should not be scared to rock the boat!
Ask your HR department for all the investment strategies available to you, as most funds offer different investment options. And ask for a breakdown of the management fees.
Your best option normally depends on your retirement horizon and, as a general rule, if you are close to retirement a low-risk strategy is the way to go. But if you have many saving years ahead, a high growth strategy is usually optimal as it has the highest probability of maximising your savings over time.
However, most funds that offer investment choices will have a default strategy, which is usually best as it is set by the fund’s board of trustees on the advice of experts. It is also likely to be the most cost-effective solution.
If your company’s retirement fund does not include index tracking (or passive investments), write to the principal officer and ask that the trustees make such funds available.
National Treasury’s 2019 Default Regulations state that index-tracking investments must be considered by trustees because passive investments can reduce management fees by more than a half – from an average of 0.90% to as little as 0.40% per annum.
Like I said, take away all the jargon designed to intimidate you, and understanding your retirement options really isn’t rocket science.
Don’t turn a blind eye to the damaging effect of high fees; act now, empower yourself, and take control of the cost of saving for your retirement. It’s the easiest way to a more comfortable retirement.