Savers paying millions in fees

It's known as the "quiet robbery." That's the nickname for the management fees that pension savers pay their money managers every month. These fees quietly but steadily eat away a massive portion of the saver's hard-earned money. And when retirement time approaches, the damage already has been done.

A check by TheMarker found that the average Israeli saver will pay his pension fund fees totaling millions of shekels over the course of his career.

A worker who earned an average of NIS 30,000 a month for 37 years, and put his pension and severance payments into a provident fund (kupat gemel), will pay a total of NIS 1.5 million in fees - equal to about a third of the NIS 4.1 million shekels he will actually take home at age 67.

If the worker paid relatively high management fees of, say, 2% annually, he'll be left with NIS 3.6 million, after paying a total of NIS 2 million in fees.

The saver who puts his money into a management insurance fund (bituah minhalim) is even worse off. When he retires, he'll have NIS 3.9 million in his bank account, and have paid NIS 1.5 million in fees to his money managers - enough to buy an apartment in a Tel Aviv luxury tower. And if his employer didn't negotiate better terms, and he paid relatively high management fees of 7% of all periodic deposits plus 1.4% on the account balance, he will have paid more than NIS 1.7 million in fees.

Currently, young savers are being offered comprehensive pension funds, which include the pension fund itself, plus disability insurance and exchange-rate insurance. They might do better than people invested in provident funds or management insurance, but they'll also lose no small amount of their savings to fees.

A worker who puts her money into a pension fund will pay NIS 951,000 over the course of a 37-year career, leaving her with NIS 4 million, which will be divided into monthly payments based on her life expectancy. Pension funds cap deposits at those based on a monthly salary of NIS 17,928.

In addition to a pension fund, your average saver puts money into a continuing education fund (keren hishtalmut) every month. If you wait until retirement age to withdraw that money, you will have paid NIS 810,000 in management fees over 37 years. However, if you withdraw after only 15 years, you'll have paid NIS 80,000 in fees.

A person earning NIS 20,000 a month won't do much better. Over 37 years he'll have paid NIS 1 million to his provident fund managers, and will be left with NIS 2.7 million in savings. Management insurance will leave him with similar savings and fees.

Ilanit Goldfarb, manager of Bank Beinleumi's pension advice department, says different fee structures make it difficult for customers to compare saving plans.

In most cases, however, those fees weren't paid for nothing. TheMarker's simulation presumed that managers obtained nominal annual returns of 4%. Without that, both savers and their money managers would earn far less.

However, more modest fees would leave managers with nice profits, but let savers keep a more appropriate portion of their earnings - if that money were left in savers' accounts, it would be compounded over the years, and thus its impact would be more than the nominal sum of fees.