Companies fail to tell their retirement fund beneficiaries about their options. This must change, writes Maya Fisher-French
For years, I have been calling on the retirement fund industry to provide financial education to their members. This is a multitrillion-rand sector with an extensive food chain, which includes fund managers, asset consultants, retirement fund administrators and employee benefit consultants – all effectively paid by the members’ contributions.
Yet we have a retirement crisis, with 92% of retirees having insufficient income on retirement and more than half unable to meet their monthly expenses. Clearly, something needs to change.
Yet when I raise the question at retirement fund conferences, I am told that members need to seek independent financial advice and that it is not the role of the employee benefit consultancies to provide advice when members leave the fund.
As a result, we have an environment where employees build up their retirement benefit within the company fund with very little input or engagement on what they are invested in, or what it means to their retirement outcome. Yet when they change jobs or retire and they want advice, they have to go into the retail market and find their own financial adviser.
Not surprisingly, this creates a motivation hurdle and most people don’t bother to access advice because they find it easier to just cash in their benefits.
In many cases, the retirement fund balances are relatively small and may not attract the interest of professional financial planners. In other cases, the retiree may fall into the hands of incentive-driven advisers who sell them inappropriate, high-fee retirement vehicles.
Part of Treasury’s retirement reform is aimed at removing this hurdle by providing default preservation and annuity options, as well as introducing “retirement benefits counselling”.
The latter requires “disclosure and explanation, in clear and understandable language” of the risks and costs of the member’s options.
It is disappointing that it took legislative changes for companies to act. But, last week, Sanlam Employee Benefits became the first mover in this space, announcing that it would offer retirement counselling benefits at no extra charge until 2020, when this will be reviewed.
The response to this announcement has revealed the various vested interests and a general distrust in the industry.
As one can imagine, some financial advisers are not happy as they are concerned that this will affect their bread and butter income. Most financial advisory practices focus on post-retirement funds, as that is the largest pot of money most salaried people will have.
Other reactions have revolved around conflict of interest and that Sanlam could use its position to promote and sell its own products.
As Jaco Pretorius, CEO of Ensimini Financial Services, wrote this week: “It is important to appreciate that the regulations do not aim to be prescriptive to the members of retirement funds, but are aimed at improving retirement outcomes. The format and content of retirement benefits counselling will evolve over time. Our main concern is that this should remain independent of any product provider.”
David Gluckman, head of special projects at Sanlam Employee Benefits, says the details of how Sanlam plans to provide counselling to members are still being developed, but that it will be counselling and not advice.
This means it will focus purely on issues relating to the retirement fund, and what the various options and implications are regarding preservation, transfers, tax and annuitisation.
Gluckman says Sanlam will not actively call members, but will provide a call centre for members who wish to receive counselling about their retirement funds. It will not replace existing member call centres, which handle administration or other support channels.
“Rather, it will provide information to members before they make important decisions, such as what the options are on withdrawal and retirement, and what defaults or strategies have been approved by the trustees,” says Gluckman.
The counsellors are salary earners without sales incentives, and no referrals to any financial advisers can be made without prior blessing from the trustees.
In my view, retirement counselling should have been seen as an integral part of a company retirement fund and implemented years ago.
While we need to be vigilant about unethical practices, retirement counselling done properly should be a symbiotic relationship, which is also why it should be a free service and not an additional cost to members. By receiving proper information about the consequences of their choices, more members are likely to preserve their funds or use the default annuity options rather than taking the cash, which means the fund benefits by retaining the assets. The member has better retirement outcomes and the retirement fund provider makes more money from assets under management.
For those advisers who believe their practices will be negatively affected, we need a reality check as to how many people are currently using advisers.
Those members getting independent advice will most likely continue to do so. In all likelihood, the retirement counselling will become a safety net for those members who are not getting advice or even have access to advice.