TER Needed For Beneficiary Funds

by | Jun 21, 2015 | Comparison, Fees, Media Room, TER | 0 comments

David Hurford

Published in FA News, 21 June 2015

By David Hurford, Head of Fairheads Umbrella Beneficiary Fund

Retirement fund trustees electing to pay minors’ death benefits into a beneficiary fund are battling to make meaningful comparisons among the services and fees offered by service providers. The industry urgently needs to develop a total expense ratio (TER), similar to that developed in the investment fund industry, says Fairheads Benefit Services, a leading independent service provider.

David Hurford, head of Fairheads Umbrella Beneficiary Fund, says that trustees have a fiduciary duty to satisfy themselves that the child’s benefits will be safely administered and used for the purpose for which they were placed in the beneficiary fund, that is to pay education related costs and general well-being expenses.
“Yet, unfortunately, among the major service providers the quality of service differs significantly, as do the fees that are charged. As a result trustees find it hard to make meaningful comparisons. Often, the headline administration fees charged by a provider may be well below the total costs incurred by the member. This can be due to inflated investment fees, commissions or other undisclosed costs which are often either not included or are underestimated when comparing various service providers.
“For example, some service providers charge annual administration fees as low as 0.5% of assets under administration, but a closer look at their investment fees reveals fees of 1.5% pa and more for the equivalent of a money market investment vehicle. That is before adding in transaction fees, funds costs and termination fees,” says Mr Hurford.
Fairheads Benefit Services has developed a model to provide a simple, standardised way for retirement fund trustees to compare the costs associated with beneficiary funds and umbrella trusts.
Mr Hurford says that if an industry-wide TER equivalent were adopted, similar to the Fairheads model, retirement fund trustees would be able to spend more of their time considering the quality and value add of the services relating to fees. What appear to be the lowest fees may not be in the best interests of the minors whose benefits trustees are paying into the beneficiary fund.
“Given that beneficiary fund members are vulnerable children who have lost a parent, trustees need to interrogate the level of care. They should ask questions relating to the type and frequency of communication, the investment strategy and whether investment managers are independent of the administrator.
“Such questions will enable fund trustees to accurately compare various service providers in terms of their overall cost, and make informed decisions about the value that they add to the lives of those whose funds they administer,” he says.