Employers can play a meaningful role in helping their workforce maximise their retirement savings outcomes. Mica Townsend, Group Savings and Investments specialist, explores five ways you can set your employees up for retirement planning success.
More often than not, your employees’ retirement savings represent the biggest financial asset they hold. As their employer, you have a fiduciary duty to protect your employees’ financial interests and ensure that the choices you make in relation to assessing and selecting the retirement funds in which their savings contributions will be invested are sound and can positively impact their long-term financial outcomes.
A trend that has emerged over the past few years in the retirement fund space is that more employers are opting to move away from traditional single employer standalone retirement funds towards multi-employer pension funds, known as umbrella funds, as their preferred arrangement for their employees’ retirement funds.
Umbrella funds provide a cost-efficient, professionally governed option to help you as an employer to assist your employees in meeting their retirement savings goals. This has been particularly useful for smaller and mid-size employers who lack the scale to truly benefit from a standalone arrangement.
Below we discuss five ways you can assess the effectiveness of your retirement fund and empower your employees’ retirement savings journey.
1. Conduct regular benchmark reviews
The market is likely to have moved on since you originally set up your retirement fund in terms of the regulatory environment, product offerings and choice. This means that factors that drove your initial choice of an administrator may no longer be the most important factor for you to consider today. Over the years, your company is very likely to have grown and changed quite significantly, meaning that what was once the right decision for you and your staff members may no longer be the optimal choice. In fact, it could be that the most favourable solution may not have even been in the market at the time you set up your retirement fund.
Therefore, regular reviews against the market can help make sure that your offering is still competitive and the one most likely to help your employees reach their retirement goals. If you haven’t benchmarked your fund in the last five years, now may be a good time to do so.
Some administrators can help you compare their offerings against your current structure. Alternatively, you can use the services of an independent financial adviser to facilitate this process. If you have funds in mind that you want to know more about, you can instruct them to include them in their analysis. You will always know your employees’ needs the best and can, therefore, highlight your priorities.
As well as looking at the costs, you would also want to understand the flexibility of the retirement solution and the level of service you can expect from that provider.
2. Know your costs
Understandably, costs have been a hot topic over the past few years, particularly with the rise of index-tracking funds in South Africa. While it is true that the lower the cost, the larger the contributions a member can make towards their retirement pot, the cost is not the only important factor to consider; there is also the question of whether the costs you are paying represent value for money. This is something that should be analysed during your review process.
To determine whether what you are paying is commensurate with the benefit you are receiving, you first need to be able to calculate your total costs. Unfortunately, in the pension and provident fund space, this can be quite a complicated process. Even with the introduction of the Retirement Savings Cost disclosure for members of the Association for Savings & Investment South Africa (ASISA) in 2019, it is still more opaque compared to the individual retail space and the well-understood Effective Annual Cost disclosure.
Most employers are aware of their administration fee, as this is the one that is explicitly paid and where much of the focus lies; however, this usually represents the smallest component of the total fee structure. The bulk of your fund costs are made up of investment management fees (also called asset management fees), adviser fees and other add-on fees such as policy fees, platform fees, trustee levies and regulator levies.
Ask your existing provider to provide you with a breakdown of all your fees. Understand which fees are levied on your contributions and your fund assets. After all, you cannot question something that you do not know. The total figure may shock you. If they cannot give you a clear and straight answer, this may be a sign that this is not the right structure for you. Look for an administrator that has a simple, transparent fee structure, or at the very least, discloses all the associated fees on your benefit statements or in an easy-to-access member guide.
3. Assess member education tools
As part of your review and decision-making process, you would likely have looked at the resources made available to members, in addition to the direct member updates and employer presentations that your administrator should also offer. With the advances in technology, there should be a wide range of easy-to-access tools that can prompt members to make better decisions during their investing journey and help empower them to take ownership of their retirement.
Some examples include: Preservation tools to help members understand the benefits of not cashing in their retirement fund when changing jobs, retirement calculators that can help them understand how much they need to be saving to retire comfortably, and interactive webinars, newsletters and videos to guide them along their investment journey.
Importantly, the content should be made as easily accessible as possible. Your employees are more likely to reach their investment goals when they are motivated and engaged; however, they may need some encouragement/guidance from you to use the tools on offer.
4. Encourage annual incremental increases in contributions
We have all too often heard the dismal statistics around savings levels in South Africa, particularly with reference to retirement savings. According to the 2021 Alexander Forbes Member Insights, the average South African retiree can replace just 31% of their income with their retirement savings. Over the past two years, the situation has worsened as household budgets became constrained in the wake of the COVID-19 pandemic. For various reasons, people are simply not saving enough for retirement and for many, the commonly referred to guide of saving 15% of your monthly salary can seem out of reach. However, as an employer, there are small tweaks you can make to your fund to help your staff work towards this target.
A simple but effective method is to increase your employees’ retirement fund contributions by 1% annually until a 15% total contribution is reached. You can time the increase to coincide with bonus or salary increase cycles. This means that even if one starts on a lower contribution, over time, they will be contributing a greater amount towards their retirement nest eggs.
Psychologically, incremental increases also help ease the tension your employees may feel about making present-day trade-offs for their future selves and to get into the habit of annual savings increases, an approach that can also be applied to other financial planning goals.
5. Encourage additional voluntary contributions
The more your employees can put away, the better. This not only allows them to take greater advantage of the tax benefits of saving, but also means that they are putting themselves in a better position to build a sustainable nest egg at retirement.
Every year, taxpayers contributing towards structured retirement funds are able to make a pre-tax contribution of up to 27.5% of the higher of your taxable income or remuneration, capped at R350 000 per tax year. This essentially lowers the income tax that is paid to the South African Revenue Service (SARS). In addition to general reminders for employees to top up their funds, there are also particular times of the year, such as the end of the tax year and when annual salary increases are scheduled, you can leverage to drive this message.
Another way to increase employee contributions is to offer to match their contributions as a way to incentivise them to contribute at a higher rate than the minimum rate required. By way of example, if members had three contribution options to choose from (5%, 7.5% or 10%), you may choose to only match the employer contribution for those electing for 7.5% or more, or you could set the employer match percentage at 50% for lower rates but increase the match percentage for employees who opt to contribute towards their retirement funds at a higher rate.
As an employer, you are uniquely positioned to play an instrumental role in your employees’ future financial stability. Offering retirement benefits is not only a good way to get your employees to start saving for retirement sooner rather than later to help set them up for financial success, but retirement benefits can also help you retain staff and set your business apart from your competitors.
To unpack some of the points raised here, and other related topics, Allan Gray will be hosting its second virtual retirement benefits conference on 16 and 17 August 2022. Local and international thought-leaders, including world-renowned economist, Dr Mariana Mazzucato, and Daniel Susskind, senior research associate and University of Oxford Fellow in Economics are on the agenda. Some of the key issues that the event will tackle include whether the world of work really has changed, what the future of compensation in the world of work looks like and evaluating the post-pandemic shifts in the benefits landscape. Attendance is free and open to anyone who has a stake in the world of work, including CEOs, decision-makers, business owners and HR managers. To register, click here.