Mutual funds based on the pillar 3a category of retirement savings are very popular in Switzerland. The biggest benefit is that money invested in these funds can be deducted from your taxable income and wealth.
The pillar 3a retirement savings category is a tax-privileged category of retirement savings. Savings fall under this category if they are invested in a 3a retirement savings account, a 3a retirement fund, or a 3a life insurance policy. The retirement funds in which pillar 3a savings can be invested are typically the same mutual funds in which vested benefits can be invested (pillar 2a funds).
There are a number of things to consider when selecting the right retirement fund to invest in. You can find the most important points listed here:
- Risk: In the past, retirement funds offered higher yields, on average, compared to those you could earn through interest with regular savings accounts. But there is no guarantee that things will remain this way in the future.
Secondly, retirement funds do not guarantee yield rates. Funds are typically more volatile and riskier than savings accounts, and can suffer significant capital losses when performance is poor. You will have to be able to wait out these lean periods.
Tip: Only opt for a retirement fund if you are looking to invest over a long term, as investments typically require fairly long periods of time to grow substantially.
- Investment strategy: Many fund managers offer several different retirement funds with different portfolios. Retirement fund portfolios generally include stocks and bonds. They may also include other investment vehicles like real estate or money market investments.
The rule of thumb here is: The greater the portion of a portfolio made up of stocks, the higher the risk of making capital losses. Plans now offer both funds with conservative investment strategies and higher-risk funds. The portion of a retirement fund that can be made up of stocks is legally limited to a maximum of 50%.
Tip: Make sure to choose a strategy that matches your tolerance for risk.
- Performance: Pension fund performance is published on a regular basis. But while these statistics are interesting, they do not provide a clear guide to the returns you can expect to make. Firstly, not all charges are included in these assessments. Secondly, and most importantly, a pension fund’s performance in a given year is no clear indicator of its future performance. Don’t be surprised if performance across the entire portfolio looks completely different year on year.
Tip: Don’t base your expectations on a retirement fund’s past performance. A fund’s fee schedule is more important because the fees you pay remain the same regardless of a fund’s performance.
- Costs: A thorough cost comparison is a must when choosing the right retirement plan. Many funds charge prohibitively high fees that can easily cost you thousands of francs over long investment terms – eating into your profits.
The most notable cost is the annual TER charge (more about this below). But one-time costs for individual fund trades may also be added. These trading fees may be levied on purchases or sales of securities that make up a fund (so-called transaction fees). Most fees are presented as a percentage of total fund assets.
Example: If you could save just 1% on fees per year on 100,000 francs worth of assets, over a 10-year period you would save more than 10,000 francs!
Tip: Compare all costs before you choose a fund.
- TER: The total expense ratio or (TER) is the official measure of retirement fund fees. This is primarily made up of the fund’s management fee. In Switzerland, the TER typically comes to anywhere from 0.3% to 2% of total assets per annum.
A more exact cost estimate can be found in the synthetic TER, which takes the TER fees of third-party mutual funds included in a retirement fund’s portfolio into account. If 10% (or more) of a Swiss retirement fund is made up of third-party funds, the fund is legally obligated to publish its synthetic TER.
If a retirement fund has a TER (or synthetic TER) of more than 1% then the chance of that fund being profitable is low. The more of a fund is made up of shares, the higher a TER you can expect to pay. Also note that retirement funds may have other costs in addition to the TER. These may include transaction fees, custodial fees, front-end loads and back-end loads.
Tip: Choose a retirement fund with a low TER.
- Front-end loads: Some retirement funds charge you one-off fees when you buy their shares. These fees are collectively known as the front-end load. With some retirement funds, this can be as high as 3% of the capital which you invest.
Buying into funds that charge high issuing fees is not recommended. Redemption commissions are now rarely charged, and when they are, they are usually low.
Retrocessions are not fees and are not directly charged to you as a pension fund customer. However, they can be problematic in that they may create a conflict of interests.
Tip: Choose a fund with low redemption fees, or better yet, with none at all.
- Custodial fees: In addition to administrative fees, some fund managers also charge you custodial fees for the management of your fund shares. This may add another cost equal to 1% of your total assets per annum. Note: These custodial fees apply to your shares in the retirement fund itself – not to securities which are held by the retirement fund (these fees are covered by the TER).
Tip: Choose a retirement fund which either does not charge custodial fees for the safekeeping of its shares, or which charges very low custody fees.
- Active or passive: Many fund managers now offer passive exchange traded funds (ETFs) in addition to more expensive actively managed funds. As a rule, passive retirement funds are cheaper, making them the best choice in most cases.
Tip: If possible, opt for a passive retirement ETF or a passive non-exchange-traded retirement fund.
- Consultants: Considering how high retirement fund fees are, it’s no surprise that consultants earn sizable kickbacks for onboarding new customers. Be wary of consultants who advertise expensive, actively-managed funds. They may well be considering the commissions they can earn rather than your financial wellbeing.
Tip: If a consultant recommends a retirement fund, ask them for a complete cost breakdown of that fund. Compare fees yourself to avoid being misled. The moneyland.ch retirement fund comparison lets you compare the costs of many of the biggest Swiss retirement funds.
- Fund-linked whole life insurance: Beware of insurance salespeople who try to sell you on retirement funds which are attached to whole life insurance policies. Whole life insurance policies typically have high administrative costs, which takes a substantial bite out of potential profits earned through the fund investment. There is no benefit to investing in a retirement fund this way.
It is important to understand that salespeople and consultants receive high commissions for whole life insurance sales, which encourages them to sell or recommend this product. But using retirement funds which can only be invested in through whole life insurance policies is not recommended. If you need life insurance coverage, getting term life insurance separately from your retirement savings makes much more financial sense.
Tip: In almost all cases, investing in retirement funds through whole life insurance policies is not a good way to build retirement savings.
- Selling your fund shares: As a rule, you will have to sell your fund shares when you reach retirement age. This rule applies to 3a retirement funds and to vested benefits funds.
When you invest through tax-privileged retirement accounts, you bear the risk of being forced to sell your fund shares at a loss if performance is poor at the time that you reach retirement age. Transferring assets from 3a retirement funds or vested benefits funds to pillar 3a retirement savings accounts or vested benefits accounts as much as several years in advance at a time when performance is high can be a good strategy.
There are retirement fund managers which allow you to transfer to regular investment funds when you reach retirement age. Some banks provide the option of migrating from a retirement fund to a standard investment fund free of charge. Other banks, including Bank Cler and PostFinance, do not give you this option.
Tip: Timing is everything when selling retirement fund shares. The higher the value of your shares at the time that you sell them, the more money you will get for them.
- Multiple 3a solutions: If possible, try to use more than one bank or insurance company for your pillar 3a savings. For example, you could divide your investment between two different 3a retirement funds or between a 3a savings account and a 3a retirement fund.
The benefit of doing this is that when you retire, you will not have to withdraw all of your 3a assets within the same year (individual 3a funds and accounts must be cashed out in full). Pillar 3a assets become taxable as income and wealth when they are withdrawn. If you stagger the cashing out of your 3a savings solutions over several years, you can avoid drastic increases in your income and wealth which could cause you to be bumped up into a higher income bracket. This applies to both 3a retirement savings accounts and 3a pension funds.
Tip: If you have a reasonably large amount of 3a assets, dividing them up between several 3a solutions is a smart financial move.