FedGroup recommends abolition of member investment choice for retirement savings

FedGroup, South Africa's only independent life insurance provider, believes the practice of offering member choice, in which members of retirement funds choose the assets in which their savings are invested, should be discontinued in the best interests of the public.

FedGroup's recommendation comes in the wake of the publication of the 2014 Sanlam Benchmark Survey, which shows that member choice retirement savings are badly managed by those who select the option.

"What this means is that people who opted for member choice are retiring with far less money than they should," says CEO of FedGroup Life, Walter van der Merwe. "Certainly, their retirement savings are typically well below what they should have been, making it much more difficult for them to maintain their standard of living.

"Research indicated to us many years ago that we had a duty to refuse to include member choice in our retirement savings options. This latest survey not only provides objective validation that member choice is a wasteful product choice, it also makes it imperative that the dangers of member choice are pointed out to the public and that steps are taken to eliminate it as a retirement savings option."

People who opt for member choice pay a substantial premium for it because it costs retirement savings providers more to administer individual choices.

"However, because the cost for the member choice is levied from the retirement savings, this additional fee is not transparent, and most people don't realise that this cost is actually eroding their ultimate savings," Van der Merwe says.

In addition, the man and woman in the street are not trained to understand either the various financial instruments available or the financial markets in general.

"Because they're not industry professionals, they tend to be heavily influenced by sentiment and make irrational decisions about where to invest their money," Van der Merwe says. "As a result, they try to time the market but do so after the markets have already moved. Increasing their exposure when the instruments are expensive and decreasing their exposure when the instruments are cheap - exactly the opposite of what should be done."

The benchmarking survey shows that 94% of respondents look at their returns less than four times a year. Sixty-fiver percent look at returns less than twice a year, and 42% of respondents do not know what risk profile they are invested in.

"If you're not looking at your returns at least weekly and you don't know what your risk profile is, how do you avoid damage to your retirement savings when something like the collapse of African Bank happens?" Van der Merwe says.

"When you choose member choice, you're setting yourself up as an asset manager. But, if you were to choose a professional asset manager, you certainly wouldn't choose one that had no qualifications or experience, made emotional decisions, couldn't remember where your assets were invested, and didn't watch your returns on a daily basis - and charged you extra for making you lose money.

"It really is very difficult to understand why members of the public are being allowed to be bad asset managers and deprive themselves of a liveable pension."

The benchmarking survey shows that of the people who choose member choice, 70% are not actively using it and are simply defaulting to the standard portfolio of assets offered by the retirement savings provider.

"They're the lucky ones," Van der Merwe says. "They might be paying unnecessary fees, but at least they're not gambling with their life savings."