Retirement products are complicated. So let’s get our teeth into one dimension that should always take priority: Fees.
Keep this glossary at hand when you next review your retirement product to see exactly what each fee means and how they will impact your savings in the long run.
EAC Effective Annual Cost Standard
The EAC helps investors to compare products as it breaks down fee structures in a uniform manner – almost like the nutritional information on the back of a cereal box.
When does the EAC signal alarm bells?
Consider the rate of return the product is providing. If your fees are similar to the return you’re getting (after inflation), your investment is growing nowhere. Industry opinion regards an EAC of 1.5%+ to be expensive.
What is the EAC made up of?
Everything but the kitchen sink. The main fee buckets are:
- Investment management fees
- Other – such as termination and penalty charges and underlying third party investment manager fees
Let’s take a closer look at those buckets and the fees inside the buckets.
The administration fee covers administrative costs and other record-keeping costs. An initial administration fee is not always a usual suspect on your fee statement, however, ongoing administration fees might be and are dependant on the total investment amount.
This fee is only applicable if you used a financial advisor. Remember – you can negotiate the cadence and percentage of this fee. Even better, insist on paying a once-off rate billed by the hour.
Management fees include the costs associated with marketing the retirement product and employee overheads.
A performance fee is paid to an investment manager for generating positive returns within an actively managed fund. Performance fees are included in the TER. It’s worth questioning the actual value you get from paying high performance fees
A platform fee covers the administration costs of investing on a platform.
Investing in a retirement annuity, preservation fund or living annuity? There’s a fee for that – it’s called a product fee. Payment of this fee depends on the financial services provider – some charge it, some don’t.
TC: Transaction costs
The transaction cost refers to the expenses involved in managing and administering a fund. VAT and brokerage (when the scheme changes its portfolio) are two examples of fees included in the TC bucket.
TER: Total Expense Ratio
This is what it costs to run the unit trust that makes up your retirement product. The TER includes annual management fees and administrative costs.
So, what falls under ‘annual management fee’?
- A service fee
- The fund’s bank charges and audit fees
- Custodian and trustee fees (they protect the interests of the unit holders)
How is TER calculated?
The total management and administrative costs are added up and divided by the size of the fund.
TIC: Total investment charge
This one is simple (or as simple as it gets): TER + TC = TIC
Why does this matter?
Every 1% saved on fees increases your investment by 20% to 30% over 40 years. That’s why.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.