Opinion |

How Insurance Companies Use Management Fees to Dip Into Your Savings

Nehemia Shtrasler
Nehemia Shtrasler
Israeli shekel and U.S. dollar banknotes.
Israeli shekel and U.S. dollar banknotes.Credit: grafnata/Shutterstock.com
Nehemia Shtrasler
Nehemia Shtrasler

The phone call was angry and upset. “How can they take 8,000 shekels [$2,500] in management fees? It’s daylight robbery. Do something,” a close friend commanded me after receiving the annual report of his kupat gemel, or provident fund, a type of pension fund.

I tried to calm him. I even praised him for actually sitting down and reading the report (as all of us should be doing with the annual reports we get this time of year), instead of tossing it out unopened, as in previous years. Then I said, “You have 1 million shekels in the kupa, management fees are 0.8 percent of the assets, and that in fact comes to 8,000 shekels a year.”

“It’s robbery,” he yelled again. “I’m willing to pay 800 shekels, but not 8,000. Why are they taking a percentage of my savings rather than a fixed fee? After all, they don’t work more when the amount increases.”

I told him that there’s something to that, and that there’s also a solution of sort: Request that the percentage be cut on account of the growth of his assets. “Apply to change investment houses, and when yours realizes you’re serious about switching, the customer retention department will call you,” I said. “Then you can demand that they lower the management fee to 0.4 percent, that is, 4,000 shekels a year.”

“Can you do that?” my friend asked in amazement. “It’s like a bazaar.”

“Yes,” I replied, “it’s like a bazaar. It’s time you realized that.”

And if you think 8,000 shekels sounds excessive, wait till you hear what the insurance companies collect in management fees on the “profit-sharing policies” they issued in the 1990s. Another friend of mine, who has such a policy, noticed that his management fee in 2021 was an astronomical 45,000 shekels!

“That’s not robbery, it’s actual murder,” he spat out angrily. Indeed, had they taken 0.6 percent (the norm for kupot gemel), he would have paid 12,000 shekels rather than 45,000 on his 2 million shekels in assets. A savings of 33,000 shekels in a single year!

Is it legal to charge such usurious management fees? It turns out that in the gay 1990s, when competition in this field was limited, the insurance companies persuaded the Finance Ministry’s Capital Market, Insurance and Savings Authority commissioner that they deserved to charge an exorbitant 0.6 percent of assets under management, plus 15 percent (!) of the profit earned. Because 2021 was a good year for the stock market investors earned high capital gains, of which the insurance company stole 15 percent – 33,000 shekels in his case. Together with the 0.6 percent of the assets, that comes to an astronomical 45,000 shekels in management fees. To be clear, this didn’t involve stellar management, it’s just that the stock market rose sharply.

And that’s not all. These policies also have an outdated annuity coefficient that significantly increases the monthly pension they’re supposed to pay out – but it is subject to income tax. Conversely, if the saver withdrew his accumulated savings (prior to 2000) in a lump sum, it would have been tax-exempt.

In other words, the treasury in effect encouraged people to withdraw their money all at once, which is exactly what the insurance companies want. It’s strange that the insurance commissioner played into their hands instead of protecting savers and enabling them to receive their pension tax-free, just as they could if they withdrew a lump sum. Moreover, these policies have a terribly expensive life insurance component, which becomes unprofitable over time. This, too, must be addressed by the commissioner.

Last week the insurance companies published their annual financial statements for 2021, and it turns out they’re swimming in wealth. Their profits doubled thanks to the rise in the stock market and the excessive management fees they charge. The biggest beneficiaries were the companies that manage tens of billions of shekels in so-called profit-sharing policies, whose fees are particularly insane.

The time has come for insurance commissioner Moshe Barkat to side with savers and initiate legislation that would lower these excessive management fees. Even robbery has its limits.

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