The low interest environment has left Swiss retirement savers scrounging for decent returns – a situation referred to by economists as the deliberate expropriation of savings. A quick look at the current average interest rates seems to confirm that assumption: The arithmetical average interest rates are just 0.08% for Swiss savings accounts, 0.27% for 3a retirement accounts, 0.09% for vested benefits accounts and 0% for private accounts.
As a result, an increasing number of people saving for retirement have turned to retirement funds, lured by promises of significantly higher returns. Banks have played a significant role in this development by marketing investment funds to their customers. That banks would do that is not surprising because funds are a lucrative source of revenue for banks. “But savers should exercise caution when selecting retirement funds,” warns moneyland.ch CEO Benjamin Manz. There are major differences between individual retirement funds, as this study shows.
Major differences between retirement funds
moneyland.ch analyzed the terms and conditions, costs and returns of 68 Swiss retirement funds. You can obtain a free copy of the comparison as a PDF using the request box at the foot of this page.
The results show that the average costs of retirement funds – equal to 1.18% of share value – are relatively high (accounting for all relevant fees over a 10-year term). The costs of some retirement funds far exceed this average – particularly over shorter investment terms.
Over the past 10 years, the returns of retirement funds have been much higher than those of 3a savings accounts. That is not surprising considering the performance of the stock market over the same period. The rule of thumb governing investment funds over the past decade of high growth is that funds with investments in stocks have delivered higher returns.
Administrative costs of investment funds
The total expense ratio (TER) is meant to reflect the total recurring costs of an investment fund, including administrative costs. This makes the TER is a deciding factor in determining the costs of a fund. But although the term may suggest otherwise, it does not actually include all of the possible costs involved with investing in a fund. Costs which are not accounted for in the TER include possible custodial fees (for the safekeeping of fund shares), front-end loads (share issuing fees) and back-end loads (share surrendering fees).
The TERs of the analyzed retirement funds range between a low 0.24% and a high 1.69% of share value per annum. Example: Customers who hold 50,000 francs worth of shares in a fund with a 1.69% TER pay 845 francs per year towards the costs included in the TER. Most retirement funds follow the rule that the higher the portion of a fund’s portfolio is made up of stocks, the higher that fund’s TER is.
Passive vs. active investment funds
In addition to the makeup of fund portfolios (with stock investments being the deciding factor), there are also other factors which influence costs. Passively-managed funds are normally significantly cheaper than actively-managed funds. For this reason, passively-managed retirement funds are generally preferable to actively-managed funds. Unfortunately, only a handful of passively managed funds are offered by Swiss retirement fund managers. One of the reasons for this is that fund managers earn less money on passively-managed funds.
Pay attention to custodial fees
Many savers are not aware of the fact that they may be charged custodial fees by a custodian bank for the safekeeping of their fund shares in addition to the TERs of retirement funds. For example, the Bâloise-Anlagestiftung charges custodial fees equal to 0.2% of share value per annum, the Luzerner Kantonalbank charges 0.25% per annum, the Zürcher Kantonalbank charges 0.3% per annum, the Berner Kantonalbank (depending on the specific fund) charges 0.45% per annum with a minimum annual custodial fee of 50 francs, and Swiss Life charges 0.25% per quarter (1% per year).
Front-end and back-end loads
Depending on the financial service provider which manages a retirement fund, you may be charged one-time commissions when you buy fund shares (a front-end load) and when you sell fund shares (a back-end load) in addition to the TER and custodial fees. Because these commissions are charged on a one-off basis, they have a greater impact on the total costs of short-term investments than on those of long-term investments. Front-end and back-end loads may be charged and added to fund capital or they may be paid to the fund manager as a commission (this model is less favorable for shareholders).
Fund managers which charge front-end loads include the Luzerner Kantonalbank (0.4% of share purchase capital), the Zürcher Kantonalbank (0.65%, maximum 1000 francs), Raiffeisen (maximum 1%), Bâloise (1%), the Berner Kantonalbank (0.25% to 1.5%, minimum 50 francs), Zurich (maximum 2%), Swiss Life (up to 2%, waived for online fund share purchases) and Mobiliar (maximum 2%), among others. Back-end loads are less widely used, but a number of fund managers including the Zürcher Kantonalbank, Reichmuth & Co and the Berner Kantonalbank charge back-end loads. Benjamin Manz advises customers to “avoid funds which charge high front-end and back-end loads.”
Compare total costs
Comparing the costs of retirement funds before you invest is key. A comparison should account for all relevant fees and charges, including the total expense ratio, custodial fees and commissions for buying and selling fund shares. But accurately comparing these costs is difficult – particularly for those unfamiliar with investment funds – because some fees are recurring while others are only applied once.
To make comparing retirement funds simple, moneyland.ch created a comparison of costs based on a modeled investment of 100,000 francs over a 10-year investment term. The model used assumes that the 100,000 francs will be invested from the beginning and remain invested in the fund throughout the term. The comparison reveals that depending on the retirement fund used, the total costs may be as low as 2400 francs or as high as 17,800 francs. That makes the most expensive retirement funds more than 7 times more expensive than the cheapest funds.
Fund returns compared
Along with the differences in the costs of retirement funds, there are also major differences in the returns delivered by different funds. “The fact that the past performance of an investment fund does not indicate the future performance of the same fund cannot be understated,” says Benjamin Manz. Fund performance is strongly linked to developments in the stock market, which are impossible to predict. Fees and charges, on the other hand, apply regardless of how the market develops.
moneyland.ch analyzed the historical cumulative performance data over the past 1 year, 3 years, 5 years and 10 years. Because the stock market has performed very well over the past decade, retirement funds which invest heavily in stocks have achieved higher performance. Over the last 10 years, the cumulative performance of retirement funds ranges between 21.39% (CSA Mixta-BVG Basic with 0% stocks) and 61% (Swiss Life BVG-Mix 45 with up to 50% stocks).
While these returns may seem high, they pale when compared to ETFs or stock indexes over the same period. The SMI (performance index) showed growth of 84% over the past 10 years, while the S&P 500 index climbed by 140%.
Net performance: Returns minus costs
The official performance reports account for TERs, but not for other possible costs. Because the actual net performance of retirements funds has never been published, moneyland.ch conducted a comparison of net performance based on a modelled investment. The net performance of funds with high custodial fees, front-end loads and back-end loads is significantly lower than the official performance reports would lead one to believe. For example, the official cumulative performance of the Swiss Life BVG-Mix 15 fund over the past 5 years is 15.96%, but the moneyland.ch simulation showed net returns of just 9.03% after deducting all costs.
Tips for choosing the right retirement fund
“As a general rule, you should only invest through retirement funds if you are both patient and willing to accept the risk,” says Benjamin Manz. In the case of funds with high stock investment ratios, savers must be willing to allow their investment to mature for at least 10 years. Performance figures from past years should be considered with caution because they do not have any direct bearing on future performance. If, for example, the stock market was to crash at some point in the next 10 years, the retirement funds which hold large stock investments and delivered high returns in the past will be the ones to make the biggest losses.
An important first step for individuals who want to save for retirement is to select a suitable investment strategy. If you expect the stock market to continue to grow in the coming years then investing in a fund which largely invests in stocks may suit your investment strategy, but you should be aware of the risks involved.
A good second step is to compare costs. “When choosing a retirement fund, retirement savers should pay careful attention to costs and invest in funds with low overall costs,” explains moneyland.ch analyst Michael Burkhard. The unbiased moneyland.ch retirement fund comparison lets you compare the total costs of investing in individual retirement funds. As a general rule, more affordable passively-managed funds are preferable to actively-managed funds.
Unbiased retirement fund comparison