Pension Fund Returns Outperform Fees, Potentially Adding Millions

A simulation by Discount Bank reveals that higher investment returns in pension funds can significantly outweigh management fees, potentially leading to millions more in retirement savings. The study contrasted two individuals, both aged 35, with identical starting points: NIS 400,000 in their fund and a monthly contribution of NIS 4,100. One individual paid no management fees on their accumulated balance but achieved a 6% annual return. The other paid a 0.25% fee on their balance but earned a 7% annual return. Both paid a 1% fee on monthly deposits. By age 67, the individual with the higher return was projected to have NIS 8.47 million, compared to NIS 7.13 million for the one with lower returns, a difference of NIS 1.34 million.

This substantial gap is attributed to the power of compound interest, where returns are earned not only on initial investments but also on previously earned returns. The simulation, which does not account for insurance costs, taxes, or changes in contributions, highlights that a seemingly small 1% difference in annual returns can accumulate into a massive sum over decades.

Data from the Israel Capital Markets Authority's "Pensions Net" platform supports the notion that return disparities are real and can be significant. Over a three-year period ending May 2026, the leading fund achieved a cumulative return of approximately 62.5%, while the lowest performer managed only 51.4%. While top-performing funds can change over time, the impact of returns is demonstrably larger than management fees.

Erez Caro, head of financial advisory products at Discount Bank, emphasized that there is no direct correlation between higher management fees and higher investment returns. He noted that savers can pay vastly different fees within the same investment track and receive the same return. The focus on management fees, he explained, is often due to their clear and easily comparable nature, giving savers a false sense of security while potentially overlooking underperforming funds or unsuitable investment tracks.

Discount Bank's Smart Future platform, which aggregates pension information, has revealed other common issues. Many clients discover they are paying above-average management fees, have inadequate death benefit coverage, or face a significant shortfall between their desired retirement income and projected payouts, with women experiencing a more pronounced gap. Additionally, some clients were found to have investment track risk levels mismatched with their age, a critical issue that can lead to substantial financial gains for younger individuals or significant losses for older ones nearing retirement.