If you listen to The Fat Wallet Show you would know that we talk about fees. A lot. Why? Because fees are known for hacking away at returns. Every one percent charge can have a substantial effect on how comfortable your retirement will be.
In July 2013, the National Treasury released “Charges in South African retirement funds” – a retirement reform discussion paper. It investigated retirement fund costs and fees. The report noted consumers tend to be more sensitive to initial charges, but not to smaller, recurring charges.
The following example was used to illustrate the effect of fees over a longer period of time.
“A regular saver who reduces the charges in his retirement account from 2.5% of assets each year to 0.5% of assets would receive a benefit 60% greater at retirement after 40 years.”
So how do you as an individual cut back on fees in an industry where products are complex, jargon is rife and the size and type of fees aren’t regulated?
Step 1. Don’t pay more for outperformance.
We all know that paying more for a quality product is better than buying cheap (and getting cheap). However, the same does not necessarily apply to an investment. High fees do not guarantee high investment growth, because chances are, it won’t outperform.
For example, Fund 1 is actively managed and charges 3% in fees. Fund 2 is a passively managed and charges 1% in fees. Fund 1 first needs to outperform by 2% to get to catch up with the returns Fund 2 is providing.
You’ll also incur higher trading costs as active managers trade more often than index funds. And when a fund outperforms, performance fees will come a-knocking.
A One Lapper wrote in sharing her eureka on the same subject. She wrote:
“It blew my mind that if I get 10% growth and inflation is 6%, there is only 4% left for growth (compounding) and if I pay 3% of 4% in fees, I will only get back what I put in (adjusted for inflation).”
More admin for you = more money in your pocket
Nobody likes admin. Compare fees, do the footwork and see what’s out there, such as cheaper funds that rely on passive investing to do the job. Ask your fund provider or HR to give you a complete breakdown of fees associated with your RA.
Unfortunately, complex structures and pricing models also mean an added fee of an advisor to provide guidance throughout the process of finding the correct fund. If that’s the case, then request to pay a once-off upfront fee.
As mentioned in last month’s blog, the Effective Annual Cost (EAC) sets out to provide a standard disclosure of fees that you could be exposed to when investing. This allows you to compare the impact of fees across financial products.
My work also contributes to my pension. Who pays the fees?
In employer-based defined contribution (DC) funds, charges are shared between you and your employer. Initial charges are usually footed by your employer. The recurring charges will, unfortunately, be paid by you.
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.