The short answer is ‘very worried’. The issue and ramification of costs of retirement savings are enormous, yet for some inexplicable reason, have been a South African public secret all these years.
Is it because we all know that solving this issue once and for all would be an impossible task to accomplish? Or do we really dare to admit not knowing the slightest thing about retirement savings costs? Whichever the answer, we need to get more actively involved in seeking knowledge, as this will have a drastic impact on all of our lives someday.
We know that there are 4 elements influencing how much a defined contribution plan will pay out. How long you have saved, how much you have saved, the investment returns and finally, the costs of saving all these years.
Most of us would agree that the first three elements are pretty straightforward, no? The big problem is the last portion: the costs of saving. What costs are associated with retirement savings? How are they used? A yearly reoccurring cost or once-off? And what are the effects on the overall returns?
If you are able to answer the above questions, you will find yourself in a very small minority. Unfortunately, the financial institutions aren’t helping either by hiding these costs in ever-increasing complex structures until you are truly clueless on what your overall costs are. At least, that is until years and years later when you are in a position to start claiming the retirement saving.
Accumulated Retirement Saving Decimated
Say, for argument sake, that one person is facing an annual saving cost of 2.5%, while another person is charged 0.5%. Assuming the same yearly contribution for 40 years by both parties, the latter will end up with a retirement saving of 60% (that’s sixty percent!) more than the former. That is what compounded returns will do to one’s saving.
Regarding costs, we can split them up in pretty much two camps: the commercial funds (ie retirement annuity funds) and the non-commercial funds (ie employer-sponsored funds).
Members of commercial funds may pay a much greater range of charges, especially if funds offer investment choice.
These charges may include:
- administrative charges
- policy fees
- benefit consulting charges
- financial advisor fees
- risk charges
- asset management charges
- manager selection charges
- guarantee charges
- capital charges
- performance fees
- platform fees
- and conditional charges, such as switching investments, leaving the plan, or terminating the policy
Let’s not make this any bigger than what it already is. It is not a question of whether certain costs ought to be charged or not, but whether those costs are reasonable and fair.
SA Out of Touch With Reality
The charges, fees, or overall costs levied in South Africa for retirement saving are preposterous in comparison to other countries. Finally, the South African National Treasury has recently decided to step into the ring with the R2.3 trillion retirement saving industry and fight it out (yes, that’s R2,300,000,000,000 – imagine the amounts of many percentages of annual fees on that). Fee adjustments, regulations, transparency, clarity etc are just some of the many topics that need to be tackled.
Did this article worry you? Let’s hope it at least woke you up and made you start doing research into your own retirement savings costs!