Small em­ploy­ers need to choose care­fully

Ben­e­fits and their costs not al­ways mar­ket re­lated

Finweek English Edition - - Retirement fund trustees -

ONE SEC­TOR OF the re­tire­ment fund in­dus­try that em­ploys in­de­pen­dent trustees is um­brella funds, which are used by sev­eral, typ­i­cally smaller, em­ploy­ers to meet staff re­tire­ment needs. But there are some con­cerns about them.

Ideally, an um­brella fund should a be good so­lu­tion for a small com­pany. In the­ory, sev­eral par­tic­i­pat­ing em­ploy­ers should help re­duce costs, but this isn’t al­ways the case, ac­cord­ing to Ed­ward Thom­son, MD of Verso Fi­nan­cial Ser­vices.

His main con­cern is that some um­brella funds use only one sup­plier for all ben­e­fits, in­clud­ing death and dis­abil­ity cover and in­vest­ment ser­vices.

“Th­ese ben­e­fits and their costs may not al­ways be mar­ket re­lated. When there is a sole sup­plier, it be­comes dif­fi­cult to do a com­peti­tor anal­y­sis of stan­dard prac­tice and mar­ket-re­lated in­vest­ment re­turns. Costs such as com­mis­sion and ad­min­is­tra­tion charges may not be dis­tin­guish­able for each ser­vice.”

A fur­ther dis­ad­van­tage is that many um­brella funds charge a penalty on with­drawal, for in­stance when em­ploy­ees leave the com­pany and want to move their re­tire­ment sav­ings to an­other fund. Thom­son says th­ese charges might be so se­vere that any move is ren­dered com­pletely un­vi­able.

“All em­ploy­ees are en­ti­tled to the best pos­si­ble re­tire­ment pro­vi­sion and prac­tices, re­gard­less of the size of their em­ployer. It is there­fore in­cum­bent on smaller com­pa­nies to adopt best prac­tice by con­sid­er­ing var­i­ous cri­te­ria be­fore choos­ing the ap­pro­pri­ate um­brella fund for their staff.” Th­ese cri­te­ria in­clude: • em­ploy­ers must en­sure the um­brella fund al­lows in­vest­ments and risk ben­e­fits to be placed with dif­fer­ent com­pa­nies they must ob­tain pro­fes­sional ad­vice on the in­vest­ment op­tions most suit­able for their staff they must also re­ceive con­tin­u­ing ad­vice re­gard­ing em­ploy­ees’ risk cover, anal­y­sis of in­vest­ment per­for­mance and mar­ket trends they must en­sure the um­brella fund is fully trans­par­ent in dis­clos­ing all re­lated costs, com­mis­sions and fees, and how th­ese will af­fect in­vest­ment re­turns. Thom­son says Verso fol­lows best prac­tice in all th­ese ar­eas for its um­brella funds. Trustees, who are not Verso staff, are ap­pointed to the fund. They act as in­de­pen­dent trustees, have an agree­ment in place and are paid for their ser­vices.

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