By Alisha Corbett, Head of Umbrella Fund Solutions at Liberty
It is essential to understand the impact of fees on one’s retirement outcome and what could be done to influence this.
Costs incurred by retirement funds can have a significant effect on the final value of one’s accumulated retirement savings. As most employers fix the total contribution rates that they make to a retirement fund on behalf of employees, lower fees will result in higher net contributions to retirement savings. In other words, more money will be allocated to retirement savings resulting in a better final outcome.
For example, for every 1% more that is contributed towards retirement savings, the ultimate benefit at retirement increases by approximately 10%. This assumes that a member has worked for 40 years and that their investment has earned a real return of 3% per annum.
Therefore, regularly reviewing the costs and options in one’s retirement fund could have a substantial impact on a person’s ability to retire comfortably.
To reduce costs associated with retirement savings, it is necessary to understand the fees that may be charged. However, it is also important to keep in mind that the net investment return (investment return less fees) is key in what determines the accumulated value of retirement savings, so one should not just base one’s choice solely on cost. With this in mind, let’s consider the various costs associated with retirement savings:
- Investment management charge
The investment management charge is the total amount charged for managing the retirement savings investments and is dependent on the investment portfolio choice and level of assets. It includes investment management fees, any performance or guarantee fees, investment administration fees as well as asset handling fees in some instances.
- Advice charge
The advice charge is the amount paid towards the provision of advice and intermediary services. It includes commission for the provision of advice by brokers or financial advisers, which is based on the total premium paid by the employer and is typically negotiable, as well as investment consulting fees not included within the investment management charge.
- Administration charge
These charges cover the expenses of administering the retirement benefit and are in the form of a monthly administration fee, which may include a distribution cost, where applicable.
- Other charges
These charges relate to the costs incurred from governing the retirement savings account (Governance levies) as well as levies imposed by the Financial Sector Conduct Authority (FSCA). It could also include other charges, where applicable, such as premiums or charges for guarantees.
An Effective Annual Cost (EAC) report provides a view of the current costs associated with existing retirement savings. You can request an EAC report from your adviser or service provider.
In addition to the aforementioned costs, risk benefit charges for risk benefits such as life cover, disability cover and funeral cover, are also applicable within umbrella fund solutions. These costs depend on the risk benefits provided or taken up within the umbrella fund options selected by employers on behalf of employees.
Because umbrella fund solutions are bundled offerings of risk and retirement products, the lower the premiums paid towards risk benefits, the higher the net contribution to member’s retirement savings. This is because the risk benefit premiums are deducted from the total contribution amount paid, with the balance put towards the member’s retirement savings account.
A possible reduction in risk benefits, and hence risk premiums, should be balanced with the need for adequate risk cover to provide for one’s financial needs and those of their dependents in an unexpected life event. Additionally, it is important to review one’s risk benefit cover levels after important life events, such as the birth of a child, or the purchasing of a new home.
One should also be aware that risk benefits are typically cheaper when taken up through an employee benefits solution, such as through umbrella fund solutions (for groups of employees priced together) compared to when purchasing individual cover.