Which is better: Single or multiple retirement products?

Before I delve into which option is better, I would like to reiterate that the underlying investment portfolio or portfolios of your retirement fund/s is much more important than how many retirement products you have.

Investors often overlook the importance of the underlying portfolio and focus more on the amount of contributions made towards retirement products. This can be very misleading since the regular contributions often disguise the underperformance of the actual portfolio. Make sure you understand how much of the ‘growth’ that you witness in your current retirement fund value is actual performance and how much of the ‘growth’ is attributed to additional contributions made on a regular basis.

We often encounter comments that an investor’s current retirement fund is performing much better than their ‘old’ retirement funds while in reality, it is actually the other way around because of the above scenario.

Previous retirement funds will more than likely be invested in preservation funds or retirement annuities. If this is the case, you as the investor are responsible for deciding on the underlying investment portfolio – which brings me back to my opening comment.

The proceeds of your current or old retirement fund can also be transferred to your new employer’s retirement fund provided the rules of both funds allow it. It is therefore not necessary to have multiple retirement funds but there are some advantages to having more than one retirement fund.

Where the retirement fund is an active employer fund the investment portfolio is decided by an investment committee, a fund advisor, or the individual member depending on the fund rules. New regulations determine that every fund that offers fund choice must also provide a default investment portfolio in case the employee does not want to make the investment choice. Unfortunately, we find that many employers do not inform new employees correctly about their choices and then follow the route of least resistance and guide new employees to the default options that are generally conservative portfolios. Be sure of your investment choices and make sure that you choose the correct risk-rated portfolio that will meet your age and risk parameters.

Investing too conservatively for a young investor does not make sense at all. The cost of underperformance over an extended period is too severe to ignore …

Example: 1% additional return per year generates 25.4% more capital over 25 years and 31.2% more capital over 30 years. This results in a difference of more than R12 000 (in current value) income per month at retirement in 25 years’ time. Do you now understand the importance of returns?

Now onto your question. Which is better, one or multiple retirement funds?

In my opinion, it makes sense to have more than one retirement fund for the following reasons:

• You can stagger retirement. You can retire from different funds at different ages. This can help with portfolio construction, offering you the ability to diversify more. The funds earmarked for later retirement can be structured more aggressively than ones you intend to retire from earlier.
• You can simplify estate planning by nominating different beneficiaries on different funds. Bear in mind that the trustees of retirement funds will ultimately decide who inherits from your pre-retirement funds. Once the funds have been transferred to post-retirement living annuities your beneficiary nominations will be honoured in full.
• You can split your retirement income between living annuities and life annuities with different funds. Some administrators do offer the facility where ‘hybrid annuities’ can be chosen but options are limited.

Having only one retirement fund has the following advantages:

• The portfolio is simpler than multiple retirement funds. One retirement fund will be followed by one living annuity (although one retirement fund can be split into various annuities).
• Lower cost. Generally, administration fees are determined by the amount invested/administered. If you have several retirement funds administered on different platforms your administration costs will be higher than one single large retirement fund which has a single administrator. Should you have several funds invested with the same administrator your fees should be calculated on the total funds administered across all the funds. Make sure that this is the case. In this scenario, the costs should be the same irrespective of whether you have one or multiple funds.

General comments

Be careful when you change your investment portfolios on your retirement funds. As you know, all pre-retirement funds are governed by Regulation 28, which determines that you cannot exceed 75% equity, 25% property and 10% hedge fund exposure. The overall offshore exposure that you are allowed may not exceed 45% under current legislation.

If you have retirement funds that were started prior to 2011 you may find that they exceed the above limits. Funds that exceeded these limits pre-2011 were ‘grandfathered’ and those limits are allowed to be retained as long as no changes are made to the portfolio. Any change to the portfolio will necessitate that the portfolio becomes compliant with Regulation 28. Where ‘grandfathered’ retirement funds exceed the equity and offshore (especially offshore equity) limits, you may want to reconsider changing those portfolios, especially if you have an offshore bias towards investments …

If all your retirement funds are Regulation 28 compliant, it makes sense to upweight your offshore exposure and probably your equity exposure as well. If we look at Regulation 28 funds, the majority are well below the maximum allowable equity and offshore exposure. To upweight your overall offshore and equity exposure, it will mean that you may have to add specialist funds to your retirement portfolio or invest in voluntary funds. It makes sense to try and structure your investment portfolio to be 50% voluntary funds and 50% compulsory funds anyway.

Generally, South African investors should aim to achieve at least 50% offshore exposure unless they are drawing high levels of income from their investments, in which case, they should limit their offshore exposure due to the adverse effect that currency fluctuations have on portfolios from where large amounts (more than 10% per year) are drawn.

I have digressed a bit, but I feel that it is all relevant to retirement funds. You are more than welcome to drop me a line if you wish to discuss this in more detail.

Happy investing!