Carol Lenzi, from Chartered Employee Benefits’ Retirement Consulting team, and a Certified Financial Planner®, delves into the costs of saving for retirement.
The costs of providing for retirement has been subject to much scrutiny in the financial industry, and rightfully so.
It is important for you to know what fees you pay, how you are paying these fees and what they are for, when you save for your retirement. That way, you can ensure that you are not paying more than you should, and that your costs are not eroding the growth that a good investment will offer you.
Types of fees
These are the types of fees that you could pay and how they can be levied:
These fees are paid to the administrator of the retirement fund for the administration services they provide. These can be levied as a percentage of salary or as a fixed Rand amount per member per month.
Some administrators who both provide the administration platform and manage the investments may charge no administration fee and only an asset management fee.
Contingency reserve account levies: This fee is used to pay for the running of a retirement fund (operational expenses), such as FSB levies, Trustee fidelity insurance, actuarial services, audit expenses, independent Trustee expenses, and member communication.
These fees may be levied in various ways: Either as a percentage of the assets under manager in the portfolio, or as a flat rate per member per month, which is then deducted from the share of fund (or retirement fund value) by way of a sale of units.
Investment consulting and / or employee benefits consulting fees: These fees are paid to the advisors who provide their expertise, support and assistance. These can be levied either as a flat Rand amount per month or as a percentage of your salary or contribution.
Asset manager fees:
These fees are paid to the investment managers who manage the investment portfolios. As these fees are intrinsic, they are deducted before the investment performance is applied.
Performance fees can be paid to asset managers who outperform a predefined benchmark. These fees have come under a lot of scrutiny in the industry, and some asset managers have chosen not to levy performance fees on their portfolios.
Once you have identified all the fees, you need to understand whether these fees are annual fees (that may be levied monthly), and whether they include VAT or are non-vatable.
If the fees are expressed as a percentage, are they levied on the total assets under management, on the salaries or on the contributions paid to the retirement fund, and then deducted from the contributions before they are invested?
A question you could ask is: Who pays for some of these fees? For example, in your employer’s pension or provident fund, do the service providers (administrator or consultant, for instance), issue an invoice to the employer for their services on a monthly basis (who then pays these fees for you), or are they deducted from your salary or the contribution that you make?
To do a proper comparison, it is best to convert all the fees into Rands to enable you to quantify them. You could calculate the ‘Total Expense Ratio’ or ‘TER’, which is a measure of the total cost associated with managing and operating your investment and can be calculated by dividing the total cost of your fund by the total assets under management.
This may seem like a daunting task to do on your own, and it is preferable to seek counselling from a CERTIFIED FINANCIAL PLANNER®.
And bear in mind that we at Chartered Employee Benefits are always on hand to assist and to guide.