The range of umbrella funds features and fees makes it difficult to compare their costs, Michelle Acton, the principal consultant at Old Mutual Corporate Consulting, says.

Employers need an in-depth understanding of the funds’ benefits and costs to assess the merits of moving from a stand-alone retirement fund to an umbrella fund, and, if they do move, to choose the most appropriate umbrella fund, she says.

Cheap is not always best, and employers need to assess several factors and features to determine which fund will best enable their employees to save adequately for retirement, Acton says.

The main costs are for administration, governance, advice to the members’ employer and the fund, and investment or asset management. Different umbrella funds will structure and calculate these costs in different ways, Acton says. For example, some fees are calculated as a percentage of assets, while others are based on a set rand cost per member or a percentage of salary.

She cites the example of a fund that has 200 members working for an employer, R10 million in assets and where the average salary per member is R10 000 a month.

If the fund charges R5 000 a month for administration and R2 000 for consulting and advice, the total of R7 000 could be charged as a fixed R35 a month for each member (R7 000 divided by 200 members).

But if the fees are charged as a percentage of salary, members will pay 0.35 percent of salary (R7 000 divided by [200 x R10 000]).

If the fees are calculated as a percentage of the members’ savings in the fund, each fund member will pay 0.07 percent a month (R7 000 divided by R10 million).

The three different ways of charging fees result in different types of members paying different amounts (see table).

Acton says charging fees as a percentage of payroll helps to prevent lower-income members from paying a disproportionately larger share of the costs.

A fund with a mix of low- and high-income earners might choose to charge a fee as a percentage of payroll, with higher earners effectively cross-subsidising lower-income earners – this is quite common in South African umbrella funds.

Although a fee as a percentage of assets may seem like an attractively small percentage, it can, depending on the membership profile, result in a members who have accumulated more benefits, such as those who are closer to retirement, experiencing a larger reduction in benefits. These differences aren’t necessarily immediately obvious to members, Acton says.

Acton says it isn’t uncommon for a fund to have a combination of two or more types of fee structure, so that the fund can provide members with a more flexible customised option.

She says that fees structured as a percentage of assets might, in fact, be more damaging for members than a combination of two different types of fees, comprising a rand cost per member for administrative costs and a lower, asset-based fee for investment management.

Acton says another challenge employers face when comparing the fees is that investment management may be charged by way of a deduction from your fund values after the investment return has been allocated, or by reducing the investment return allocated to your fund value. The overall impact is the same, but the comparison of fees may be more complex, she says.