The retirement fund industry needs to self-regulate its umbrella fund offerings, an independent trustee told the recent Institute of Retirement Funds (IRF) conference in Johannesburg.
Bashkar Latchman, who serves as an independent trustee and a principal officer on a number of retirement funds, says some employers should be prevented from transferring members of their existing funds to umbrella funds, and members who are moved into such funds must be protected.
The size of funds that can join an umbrella fund should be capped so that funds large enough to have sufficient economies of scale and buying power to be run cost-effectively as independent funds remain as stand-alone ones, Latchman says.
In umbrella funds, employees from a number of different employers are pooled into a single fund to save costs. The funds are usually sponsored by a financial services company.
Hugh Hacking, the umbrella fund product manager at Old Mutual, says companies that sponsor umbrella funds seek profits through such sponsorship, but |are typically able to offer competitive benefits by combining a number of services to the fund, such as death and disability cover, administration services and investment management.
Employers may prefer umbrella funds because key employees are spared the time it takes to run a stand-alone fund, especially as the governance of funds has become increasingly complex.
Sanlam's 2010 Benchmark Retirement Fund Survey shows that an increasing number of employees are now covered by umbrella fund arrangements and a number of larger employers are moving their employees into these funds.
Latchman says the industry needs to consolidate the number of umbrella funds, because there are too many funds on offer and some funds are used by very diverse employers.
He says employers should choose umbrella funds that are aligned to their members' needs and this should result in similar employers being pooled in each fund.
Members disempowered
Umbrella funds use professional trustees, and members who move from a stand-alone fund into an umbrella fund lose the right to elect 50 percent of the board of trustees. Members should consider whether they are prepared to be disempowered in this way, Latchman says.
Some umbrella funds allow participating employers to appoint employer-employee committees to convey to the trustees the concerns of members. Latchman says these committees should be mandatory.
The number of trustees who can be appointed by the sponsor of an umbrella fund should be limited, he says.
Anne Cabot-Alletzhauser, the chief strategist at Advantage Asset Managers, says umbrella funds claim to have "independent" trustees but you should never lose sight of the fact that the sponsoring financial services company appoints these trustees.
Hacking told the IRF conference that if your employer-sponsored fund has less than 5 000 members, it may consider using an umbrella retirement fund rather than a stand-alone fund.
But the case for moving to an umbrella fund must be researched properly - there is no best umbrella fund, rather only the best fund for your needs, he says.
Sanlam's retirement fund survey found that participants in umbrella funds generally do not fully understand the costs associated with such funds.
Hacking says if your employer or your fund trustees are considering a move to an umbrella fund, they need to base their comparison of funds on the full spectrum of costs of the options being considered, including the administration fees, the investment fees and the advice or consulting costs.
He says that when considering a move to an umbrella fund, a sponsoring employer must ensure that the fees are right for the members and should not just compare them to the costs that their existing fund pays.
The best way to compare the impact of the costs on members' contributions is to consider the reduction in yield, Hacking says.
Low monthly administration fees are generally good for employees who are making low contributions to the fund, while low investment fees are generally better for employees who are making relatively high contributions to the fund, he says.
Hacking says employees who are making contributions at the middle-of-the-range level may be indifferent to whether the administration fees or investment fees are higher within the umbrella fund.
Service fees
Cabot-Alletzhauser says any service provider that is responsible for the day-to-day activities of the fund, such as administration, should be entitled to an ongoing fee calculated as a percentage of assets.
Other service providers must charge a fee related to the service, she says.
Hacking says says another important factor to look for in an umbrella fund is good communication. Look for a provider that can help your members understand where they stand as they move towards retirement.
Cabot-Alletzhauser says defined contribution funds offer members no clarity about where they are going with their retirement savings and whether they will get there.
She says this is exacerbated in umbrella funds because the employer or consultant's role is diminished.
Hacking says embers may demand more investment choices for their savings, but this is probably the least important reason for moving to an umbrella fund, and it often encourages members to move into inappropriate underlying investments.
Cabot-Alletzhauser says member choice is a great money-spinner for the industry and tends to involve members (and their advisers) chasing performance and brands at the wrong time, but trustees are absolved of any responsibility.
She says every umbrella fund should offer a truly low-cost default option and then allow employers and members to understand the trade-off in opting for potentially higher - but less certain - returns against the performance drag of the additional costs involved.
She says that, in future, umbrella funds could be owned by members through, for example, a co-operative. This type of fund could use its buying power to seamlessly facilitate your move from pre-retirement savings into post-retirement pension options.
Cradle-to-grave structures could reward loyal investors with lower costs, Cabot-Alletzhauser says.
She suggests group-rate annuities to members with no up-front commissions.