High Pension Management Fees Can Erode Savings, Experts Advise Review

Many Israelis are paying significantly higher management fees on their retirement savings than necessary, potentially costing them tens of thousands of shekels over time. Older "manager insurance" policies, for example, can charge 0.6% of the accumulated balance plus 15% of profits. In a good market year, a saver with 2 million shekels and 400,000 shekels in profits could pay around 12,000 shekels on the balance and an additional 60,000 shekels from profits, totaling approximately 72,000 shekels annually.

Even in simpler pension or study funds, a seemingly small annual difference of 0.2% to 0.4% can amount to substantial sums over 20 to 30 years. For instance, a saver with 1 million shekels paying 0.7% annually spends 7,000 shekels, while paying 0.4% reduces the cost to 4,000 shekels, leaving an extra 3,000 shekels in savings each year to generate further returns.

The pension system is designed to make it easy for savers to remain with their current provider, often without checking their fees for years. This benefits the financial institutions, which retain the client's money and automatically collect management fees. Some older policies also include benefits like guaranteed low annuity conversion rates, which, while valuable at retirement, can make switching to a cheaper plan difficult due to fear of losing these advantages.

Experts suggest that current average management fees in pension funds are around 1.5%-1.6% of deposits and 0.15% of the balance, with better rates available in "chosen" pension funds (around 1% of deposits and 0.22% of the balance). Savers paying 3%-4% of deposits and 0.3%-0.4% of the balance should explore alternatives. For example, an employee depositing 4,000 shekels monthly with 800,000 shekels saved could reduce annual fees from approximately 3,600 shekels to 1,680 shekels by lowering their rate from 2.5% of deposits and 0.3% of balance to 1% and 0.15% respectively, saving nearly 2,000 shekels annually.

For study funds, the difference is even more pronounced. A saver with 600,000 shekels paying 0.8% annually spends 4,800 shekels, while a reduction to 0.45% lowers the cost to 2,700 shekels, saving 2,100 shekels per year. Negotiating fees is possible, often by presenting a better offer from a competitor. For older manager insurance policies, a thorough calculation is needed, weighing the value of guaranteed benefits against high fees before considering a switch or partial transfer of funds.