Pension Fund Management Fees and Investment Tracks: Key Controls for Savers
In Israel's pension savings system, three main factors determine the final amount: contribution levels, investment returns, and management fees. While salary dictates contributions and returns are unpredictable, management fees and investment tracks are directly controllable by the saver and can be changed with a single phone call.
The law permits a maximum of 6% of monthly contributions and 0.5% of annual accumulated savings for comprehensive pension funds. Both fees are charged concurrently, making it essential to consider both when comparing funds. Default funds selected through a tender process charge approximately 1% of contributions and 0.22% of accumulated savings. However, some individuals may still be paying significantly higher fees, such as 4% of contributions and 0.4% of accumulated savings, which were set years ago and never re-evaluated.
The fee charged on accumulated savings is more impactful over time, as it applies to the entire sum annually. A difference of just 0.2% on an average accumulated sum of NIS 700,000 before retirement can amount to tens of thousands of shekels over decades, not including the potential returns on that saved money. The fee on monthly contributions is more noticeable early on when savings are smaller.
Savers can negotiate management fees, as pension funds aim to retain clients. The default fund rates serve as a good starting point for negotiation. Individuals often benefit from reduced rates through collective agreements at large workplaces, but these rates may revert to standard levels upon changing employers, a detail worth checking during job transitions.
Comprehensive pension funds often utilize a default age-based investment model, automatically shifting savers between three risk profiles: up to age 50 (approx. 50% equities), 50-60 (approx. 35-40% equities), and 60+ (approx. 20% equities). This model aims for a gradual reduction in risk as retirement approaches. However, this default may not suit everyone; for instance, a 62-year-old planning to work until 70 and live off their pension for twenty years afterward might find a 20% equity allocation too conservative for their long investment horizon.
Changing an investment track within the same fund is immediate and tax-free, without affecting insurance coverage or seniority. Transferring funds to a different fund (portability) is also tax-free but can impact insurance coverage, introduce new waiting periods, and potentially cause the loss of beneficial terms like guaranteed annuity rates from older policies, which can be more valuable than savings on management fees.
Savers can review their fees, investment track, and accumulated savings in their annual pension fund report or through the Pension Clearing House, which consolidates all pension products under an individual's name, including forgotten old accounts. Consolidating small, dormant accounts can lead to better fee structures.
Recommended actions include checking current management fees against default fund rates, assessing if the current investment track aligns with the intended withdrawal date, and verifying that no dormant accounts are incurring unnecessary fees. These annual checks, taking less than an hour, can significantly increase long-term savings.
