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Investment Vehicles in Pension Funds

A majority of people do not save enough for retirement, and those who save, do so without understanding investment vehicles or without a goal and investment horizon. Many pension plans around the world are trying to address this by auto-enrolment, and default funds. Industry statistics in the US show that participation rates in pension plans has increased by around 15% as a result of auto-enrolment.

While this is good, the default contribution rates for those auto-enrolled, however, are very low compared to those of the persons who elect to participate in pension plans. These employees may also not receive all of the potential matching contributions made by their employers. Employers will need to incentivize participants to save more.

Putting the money in a pension plan (automatically) is only one half of the battle won. The default investments offered may not be suitable for all kinds of employees. This problem is solved partially by investment options such as lifecycle funds/ model portfolios which are very popular in the US, or by managed accounts, where dedicated money managers determine the individual portfolios.

The expenses of these investment vehicles are so high, that it sometimes negates the effects of the models themselves. I have seen fees for managed accounts as high as 1% of the assets managed. On an average, persons who pay no investment fees are about 15% better off when they retire.

Even with other investment options such as Annuities, there is a lot of Cross selling coupled with exorbitant fees (Management fee, admin fee, and surrender charges), and added to this, the kick backs that the agents receive as commissions, and high penalties associated with premature withdrawals.

I recently came across an annuity provider in the UK who had advertised that persons who smoke or have impaired health qualify for an enhanced payout. It is deplorable that the experts of the financial industry disregard financial goals of individuals and entice laymen who do not understand investment vehicles with rubbish campaigns such as this one.

I am inclined to recommend ETFs (ones that mirror a reasonable index or even bonds) as one of the investment options. The fees are substantially lower as there is no active management. They offer intraday trading (although not so much a positive for a retirement plan) and no early redemption fees. The only downside to ETFs if at all, is that the exposure is sometimes high on a small number of stocks.

Ultimately the investors need to be careful about where they put their money, and understand the investments and their fee structures of all the investments before they invest.

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