Actuarial news and views from Cape Town and beyond

Should investment choice be abolished in retirement funds?

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Fedgroup argues that investment choice is not suitable for retirement funds and should be abolished. But their arguments are a bit muddled:

– on the one hand, they argue that members don’t look at their investment choices frequently enough, which means that they are not able to react to markets timeously and so end up chasing bad returns, switching at the wrong time and making more losses than anyone who just stays put in their portfolio

– on the other hand, they admit that most people who are in individual member choice just use the default anyway and don’t ever switch.

They also argue that individual member choice is very expensive and not transparent since it comes out of the savings (presumably, as opposed to an additional investment fee?). I am not sure what they mean – some administrators charge a higher rand per month fee for more investment choice, while others charge a higher asset based fee. Asset based fees have a vastly higher effect on savings than monthly fees, and both are usually declared quite clearly (but the consequences may not be clear to members – how does R15 per month compare to 10 basis points (0.1%) of assets per year?).

My final complaint, though, is that they say that choosing individual member choice means that the member is the asset manager, and needs to react to situations like African Bank by changing their investment choice. I think this is completely wrong – the choices selected by members are still asset management houses, who are equipped to manage stock selection and tactical asset allocation. The only reason to switch asset managers is because you believe they no longer have the expertise or that their investment philosophy is wrong.

But none of this really settles the question of whether investment choice is a good thing or not for retirement fund members – what do you think?



One thought on “Should investment choice be abolished in retirement funds?

  1. I’m a believer in freedom.

    I think there’s a minimum amount the Government should insist is invested with them to avoid people becoming a burden on the State, and which pays out an inflation-linked annuity at retirement. Above that, people should be free to do as they choose.

    On the topic of expenses – all Retirement Funds should be obliged to report their expense ratios, and it should be made publicly available so that all can see who the bad boys are.

    Employees shouldn’t be forced to invest in their Employer’s scheme – if they feel it is inferior, they should be allowed to go and shop around the retail retirement fund platforms. If they want to play asset manager and select their own stocks and shift asset allocations, let them (with fair warning).

    This opens the door to allowing Employers to just offer a sensible default (with the low costs and lack of cross-subsidies which Fedgroup likes), whilst at the same time employees retain the right to exercise their own choices.

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