Although automatic enrollment has been credited with significantly boosting pension participation in the UK, it can also lead to more fees for savers, according to UK-based independent research organization The Pensions Policy Institute (PPI).
In a recently released report, the Pensions Policy Institute examined the extent to which fee structures affect savers’ retirement outcomes, and found that fee levels and structures play a key role in determining retirement outcomes.
According to the report, automatic enrollment can cause many people reaching retirement to end up with multiple pensions, which means they can lose out by paying multiple fees. Even with automatic enrollment, individual plans don’t travel with employees as they change jobs. The trick is getting employees to roll over those accounts into a single vehicle rather than ending up with a handful of small pensions each charging fees.
Having multiple pensions can also mean that savers are at risk of losing track of their pensions. The report notes that if accounts are small enough individual savers might forget about them or be unaware that they can be rolled over into their current account.
The research also found that while transparency is important, it isn’t necessarily a solution.
“Greater transparency in terms of default strategies and their costs and charges will allow for greater understanding of the charges levied by providers,” said the PPI, “but may not always produce data that members or employers can understand or use effectively.”
For individuals that do end up with more than one retirement account, certain fee structures can help ease the burden.
Combination fees, in which an annual management charge (AMC) is combined with either a flat fee or a contribution fee, generally provide better outcomes over time than an AMC-only approach.
“This is particularly true when an individual has deferred or multiple pots, where the same AMC continues to be levied even when contributions have ceased,” said the report. “However, fixed flat fees can erode deferred savings over time.”