Investment Provident Funds Mark Decade: Impressive Returns Face Scrutiny
Translated & summarized from Calcalist by baba
Investment provident funds in Israel are marking their tenth anniversary, having become a popular savings tool since their 2016 launch. While offering impressive returns and tax benefits, particularly for long-term retirement savings, their performance is being compared unfavorably to passive index investments like the Tel Aviv 125 and S&P 500. Management fees have generated nearly 2 billion shekels for fund managers in recent years. Future challenges include proposed regulatory reforms and increased competition from low-cost self-directed trading platforms.
The story in 6 lines · by baba
- Investment provident funds in Israel are celebrating 10 years since their 2016 launch.
- Funds have generated nearly 2 billion shekels in management fees between 2020 and August 2026.
- Equity-focused funds yielded 180.5% returns, but index funds like S&P 500 offered higher gains.
- A proposed reform could reduce the tax advantages of these investment funds.
- Competition from low-cost self-directed trading platforms is increasing.
- The average holding period for these funds is reportedly only four years.
Investment provident funds, launched a decade ago at the initiative of then-Finance Minister Moshe Kahlon, have become a significant savings vehicle in Israel's capital market. The product was designed to offer a competitive long-term savings option, especially during a period of zero interest rates, allowing savers to withdraw funds at any time with tax on profits, or defer withdrawal until retirement for tax exemption on gains. While the funds have provided savers with exposure to the capital market and professional management, questions are being raised about whether the value provided justifies the management fees, especially when compared to passive index investments. For instance, equity-focused funds yielded a cumulative return of 180.5% before fees over the past decade, while the Tel Aviv 125 index rose 220% and the S&P 500 index gained 224% in the same period. Despite these comparisons, industry executives point to the funds' success in offering an attractive alternative to bank deposits, particularly with potential future interest rate cuts. However, critics argue that comparing provident funds to bank deposits is misleading due to differing risk levels, and a more appropriate comparison is with index-tracking funds and ETFs, considering the management fees charged.
Data reveals that the average age of account holders is 30.3, indicating the product is also used for building long-term savings for children. Between 2020 and the first eight months of 2026, management fees generated approximately 1.94 billion shekels for the top ten provident fund managers, with Altshuler Shaham leading in fee income. The average holding period is reportedly only four years, suggesting many savers use the funds for shorter-term goals rather than long-term retirement planning. Hagai Oren, CEO of Meitav Gemel and Pension, acknowledges that a decade is a short time to assess retirement suitability but emphasizes the value of professional management and flexibility. He also notes that the product caters to different needs than self-managed investment accounts.
Looking ahead, a proposed Ministry of Finance reform could reduce the regulatory and tax advantages of investment provident funds, potentially impacting their unique selling points like tax-free switching between investment tracks. The growing popularity of self-directed trading platforms, offering cheaper access to index investing, also presents a challenge. Elad Ben-Begi, co-founder of the trading platform Blink, highlights that the capital market is now accessible to everyone, enabling easy and low-cost long-term savings. The future success of investment provident funds will depend on their ability to demonstrate added value to savers beyond mere asset accumulation, especially in passive investment tracks where the justification for fees is increasingly scrutinized.