The Bottom Line / Captive Savers

At the end of February, members of provident funds and professional training funds (kranot hishtalmut) will receive their annual reports on the returns their savings yielded in 2003. Members of the large bank-owned training funds - Kahal (run by Bank Leumi and Israel Discount Bank), and Re'ut and Kinneret (run by Bank Hapoalim), which together control about one-third of all the money invested in such funds - will doubtless rejoice to discover that their funds produced yields of 16.0-16.6 percent last year. Those are the highest yields these funds have ever produced - and for the many fund members who shun the stock exchange, it is also their only chance to enjoy the fruits of past year's bull market.

But if those same investors were to take a look around them, they would discover that they have no reason to rejoice because their funds produced the lowest yields of any training fund last year. The gap between the performance of Kahal, Kinneret and Re'ut and that of the funds that produced the highest yields is close to 10 percent.

Yet despite this substantial loss of profits, most people who save via the major bank funds will leave their money there and even continue making deposits into these funds. Even though the funds have been investing in the capital markets for more than a decade and produce differing yields, relatively few people ever switch funds - because the option of switching is generally not in the employee's hands.

Training funds are a unique and very valuable savings vehicle. Employees deposit 2.5 percent of their monthly salary into these funds, while their employers contribute an additional 5.0 to 7.5 percent, or two to three times what the employee contributes. In unionized work places, and also in many companies that employ people via personal contract, training funds are a standard benefit.

For many workers, the training fund is their principal savings vehicle, if not their only one, since contributions are mandatory, and the worker can only withdraw money from the funds after several years. And workers are generally very happy to receive these funds as a benefit, since the fact that the employer also contributes is a bonus in and of itself.

Very few pay any attention to the yields on their investment, and this is partly the fault of the employers: For years, many employers forbade their employees to switch from one fund to another, since it is easier for them to have all the workers in one fund, which enables them to write out a single check every month. But the employers' focus on convenience has led to a situation in which the large funds make little effort to achieve the highest yields for investors, since they know that this is largely a captive audience. Instead, they focus their efforts on giving discounts and benefits to the employers, who are the ones that make the decisions.

Over the last few years, however, dozens of new training funds have been established, including some by nonbank institutions, and these funds have succeeded in producing higher yields than the major bank funds. To enable employees who are already depositing into a training fund to benefit from the fruits of competition, the employers must reopen their contracts with the veteran funds and permit workers to choose among several different funds. They must also start factoring the funds' performance into their decisions, and not just the size of the discounts the funds offer on their management fees.