DC Trustees – asleep at the wheel?

asleep-at-the-wheelI was spending insomniac hours reading posts about savings on www.moneysavingexpert.com when I came upon a thread about the ABI 14 agreeing to disclose transactional costs from next summer.

There wasn’t much on the comments board – one post stood out.

Nothing new here.These pledges to be more straightforward have been made every year for 50 years.

I felt I needed to make a comment , even though no-one else seemed to be much interested.

There is something new here. What’s disclosed at the moment is only part of the truth. The scandal is about what are called trading costs.

Actively managed funds usually trade (churn) about 80% of the stock in the portfolio once a year. The FSA estimated a couple of years ago that the “round trip” cost of a trade is 1.8% of the transaction so a fund with 80% trading is costing the punter 1.4%pa on top of the fees you currently pay.

This is why most savvy companies have moved out of active and into passive funds which have reduced transactional costs and offset what they have by lending stock to others.

WHICH have confirmed this research and estimate that the extra charges are 1.07% pa of a typical fund. Their number is lower because they thought “portfolio turnover” slightly lower than the FSA but either way you should know that you may be paying twice as much in these costs than you do in all the other charges put together!

And currently these charges are not declared!

Let me say this again, you do not have to pay these charges- you can avoid them- but you have no way of telling which funds have high transactional charges and which haven’t.

One man, Terry Smith (you may know him as a boxer) but he now is a financier, has been shouting about this for a long time and I’m glad for him that people are at last doing something about it.

The move to disclose the difference in costs between funds with high transactional charges and those with low ones, will help people not to buy rubbish funds SO IT IS A GOOD THING!

Don’t look this gift-horse in a mouth – this is a big deal.

That’s what I felt I could say, what I didn’t say there but will here is that the failure of money-saving’s journalists to engage with this issue is sad but predictable. If money-saving has a fault is that it encourages people to think short-term. Saving for a holiday and getting debt-free within five years is good. But it takes investment over many years to build a proper retirement. Over many years, the cost of these 1% charges add up to 25% + of the fund and its these hidden charges that have been , in part, the ruin of many people’s retirement savings.

Tim Jones made this point very well at the NEST do this week. People are savvy about vouchers but waste thousands investing in badly managed pension funds.

Should we be worried that most people don’t give a hoot! NO! I don’t think we should. I think we should be very worried about leaving the equivalent of nuclear waste as choices on fund platforms into which people can invest.

Funds with transactional charges of more than 1% are to my mind “HIGH RISK” and trustees of occupational DC plans and indeed the trustee of a contract based plan have a duty of care to point out to members the extra risk these funds present.

I am not advocating that funds with high transactional charges be banned from fund platforms, I am suggesting that they are risk-rated “high”.

But of course that assumes we know which funds have these high charges and which don’t. Is it any surprise that the top performing global equity fund in the last year had no transactional charges (Fundsmith)? Terry Smith won’t always get it right and his buy and hold strategy will hit some short-term turbulence. But trustees, advisers and consumers who buy into Terry’s fund, do so with open eyes.

It is a truly appalling state of affairs that  it is only now that the costs of active management are coming to light. We have had alternative passive strategies with de-minimis transactional charges for many years now. I am not an investment specialist nor am I a trustee.

If these experts have missed this trick, I worry. If they knew about this and ignored it, I worry more. But for the whole industry to continue to play down this massively important issue suggests to me that we have a long way to go before we can rightly look the public in the eye and say we have our house in order.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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