Guarding the nest egg: Trustees and investment fees

As a retirement fund trustee, you’re the guardian of your members’ retirement savings. 

You’ve probably heard the term “fiduciary duty” before. It means you have a legal and ethical obligation to act in the best interests of your fund members.  

The Pension Fund Circular 130 – Good Governance of Retirement Funds, issued by the Financial Sector Conduct Authority, provides guidance on all aspects of governance for retirement funds. One of the fundamental principles of PF130 is monitoring investment management fees, which include all the costs involved in investing the members’ retirement savings.  

Ultimately, those fees are charged to members, therefore trustees must strive  to ensure: 

• Transparency: Demand clear breakdowns of all investment-related fees.  

• Value for Money: Ensure fees are fair and market-related. 

• Regular Review: Ensure fees are reviewed annually and that fees align with the agreed terms of mandated contracts. 

• Cost Control: Scrutinise every expense. 

How do trustees go about fulfilling this task?  

For retail investors, comparing investment fund fees is easy – the Total Investment Cost (TIC) is disclosed on the fund’s fact sheet. But for trustees of retirement funds, it’s more complicated. 

Every retirement fund is likely to be different, from having a few hundred members with assets worth a few million rands to large commercial retirement funds with many thousands of members and assets of billions of rands. This means investment managers contract customised investment fees for each retirement fund. Think of it like getting builder quotes: each project is different. 

When your board of trustees contracts with investment service providers, keep the following in mind: 

1 What is the total investment charge (TIC) that members are going to pay? Investment fees can be difficult to comprehend and typically comprise base fees and performance fees. Insist that the investment manager explain the basis of their calculations. Ask questions until you fully understand how each of the cost components is determined.  

2 Compare apples with apples. Not all investment portfolios have the same investment strategy and asset allocations. Passive investments (like exchange-traded funds) usually incur lower investment costs because they track an index without requiring expensive resources to be applied by an investment manager. 

Actively managed portfolios attract higher investment costs than passive ones as they require stock analysis by investment professionals who analyse market trends, research companies, and try to outperform the market. In return for outperforming the benchmark, the investment manager will typically earn a performance fee. 

Make sure that you are comparing similar types of portfolios. A portfolio that invests mostly in cash instruments will have a much lower TIC than one that invests largely in shares on the Johannesburg Stock Exchange. It is more expensive to manage a portfolio invested on the stock exchange so the fee structures will differ significantly.  

The general rule of thumb for retirement funds is that fees for passive asset management should be around 0.4%, while active asset management will attract funds around 1.00%.  

3 Use your fund’s asset size as leverage. Retirement funds usually pay lower fees than retail investors because their larger assets under management allow them to negotiate better rates.  

By understanding the PF130 and actively governing investment fees, you can ensure your members’ hard-earned money works for them. Don’t be afraid to ask tough questions and demand transparency. Your members are counting on you.