The launch of Itransact, a new index tracking retirement annuity, highlights the growth in passive investing but the costs are still too high.

This week Itransact launched the first retirement annuity to invest in exchange traded funds (ETFs). Exchange Traded Funds and index tracking are finally gaining popularity in South Africa as investors recognise that passive investing offers cost-effective investment solutions by tracking the average performance of the market rather than paying additional fees for active management which often underperforms the market.

While any retirement annuity that is able to cut costs for investors is to be welcomed, claims by Itransact that its product meets National Treasury’s targeted 1% per annum for retirement annuities are a bit disingenuous, and in fact there are more cost-effective options out there for investors.

By the time you have added the platform fee of 0.7%, the asset management fee of 0.25%, and the underlying ETF fees of around 0.25%, the actual cost for the average investor in the retirement annuity is closer to 1.3% per year (excluding VAT). This fee does decline, however, the more money you invest.

For the same cost, one can invest in an actively managed Retirement Annuity provided by Coronation. If you invest exclusively in a Coronation fund such as their Balanced Fund, which meets retirement regulations, you only pay the underlying fund management fee of 1.25%.

While exchange traded funds are gaining in popularity in South Africa due to their low annual management fees (Absa Capital ETF fees are as low as 0.1% to 0.25%) these products still require a platform for investors to access them and these platforms remain expensive. Investors with larger amounts to invest can invest cost effectively through a stock broker, but for those who are looking to invest monthly, the platforms such as Itransact, Satrix Investment Plan and ETFSA remain costly and often unit trust index tracking funds are cheaper.

Under-1% options

10X Investments (www.10x.co.za): Investors looking for a cost effective retirement annuity for under 1% a year should rather consider index tracking company 10X Investments.  10X Investments (pronounced “tennex”) has a balanced tracker portfolio that can be used for a retirement annuity or preservation fund, and provides a lifestage solution. This means that the portfolios are based on your age and years to retirement.

The longer your time to retirement, the higher the allocation to equities and as you get closer to retirement, the portfolio is adjusted, reducing exposure to equities and increasing cash and bonds in order to provide capital protection. A 10X retirement annuity will cost you less than 1% a year and there are no adviser fees. If you have a financial adviser who recommends 10X you would pay the adviser yourself for the advice provided.  Itransact is only offered through financial advisers and cannot be accessed directly. While the retirement annuity offering provided by 10X Investments also includes offshore exposure, the Itransact product does not, despite the availability of offshore ET’s.

Old Mutual Unit Trusts: Like Coronation, Old Mutual Unit Trusts have no product costs associated with investing into their retirement products and the only cost incurred by the investor is the underlying fund costs. By selecting an index tracking unit trust as your underlying fund, you can reduce your costs to as little as 0.65% per annum. For example you invest 75% of your retirement funds into Old Mutual Top 40 and 25% into Old Mutual Money Market to meet the regulation 28 requirements for retirement investments. There is however no offshore, property or bond exposure.

Fortunately as investors become more aware of the impact of fees on their final retirement nest egg, we will see more cost-effective products coming to market and we should start to see the availability of more retirement products with costs of less than 1%.

What is an exchange traded fund?

An exchange traded fund is listed on the JSE and tracks the performance of the index. It does not attempt to beat the market, but merely to mirror the return. As an investor, you actually hold the underlying shares which are held in your name. Basically an ETF provides instant access to a number of shares for the cost a single investment.

Impact of costs on your final lump sum

This is the impact costs would have on a lump sum investment of R100 000 saved for 20 years towards your retirement:

• If there are no costs you receive 100% of your final savings
• If your investment has a cost of 1% per annum you receive 83.12% of your lump sum
• If your investment has a cost of 2% per annum you receive 69% of your lump sum
• If the investment has a cost of 3% per annum you receive 57% of your lump sum
• If the investment has a cost of 4% per annum you receive only 47% of your lump sum