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Understanding / Avoiding Fees

There’s no sugarcoating it; finance charges are one of the biggest inhibitors to the growth of your retirement and you should strive to avoid them like the plague.  Not paying 4% of your pension for fees sounds a lot like making an additional 4% on your money (it’s even more when you take compound interest into account).

There are two kinds of fees that you pay from your pension fund: a fee on all deposits (hafkadot) and a fee on all the money accumulated in your fund (neches).  The accumulation amount is quoted annually, so it must be divided by 12 in order to calculate the monthly fees. 

For example, let’s say I currently pay in ₪ 750 into my pension every month and I already have ₪ 50,000 saved in my pension fund and a fund offers me 5% on deposits and 0.4% on accumulation:

₪ 37.50 will be taken off for deposits (₪ 750 x 5%)

₪ 16.67 will be taken off for accumulation ( (0.4%/12) x ₪ 50,000)

for a total of ₪ 54.17

Some pension plans offer lower fees on the deposits while others offer lower fees on the accumulation.  So which one is more important?  It depends on how much you are depositing and how much you have in your pension fund.  Let me give an example:

Jack was offered 2 different payment options.  With option #1 Jack pays 5% on deposits and 0.1% on accumulation.  With option #2 Jack pays 2% on deposits and 0.25% on נכס.  Which is better?

Jack has ₪20,000 in his fund and between Jack and his work, deposits ₪1,000 into his fund every month.

With option #1 Jack would pay (5%* ₪ 1000+0.1%/12* ₪ 20,000) = ₪ 51.67.

With option #2 Jack would pay (2%* ₪ 1000+ 0.5%/12* ₪ 20,000) = ₪ 28.33.

So in this case, option #2 is the best choice.  But if Jack has a lot more in his pension fund, let’s say ₪ 500,000, things would be very different.

With option #1 Jack would pay (5%* ₪ 1000+ 0.1%/12* ₪ 500,000) = ₪ 91.67

With option #2 Jack would pay (2%* ₪ 1000+ 0.5%/12* ₪ 500,000) = ₪ 228.33.

So now Company #1 is by far the better choice.  As you start out the percentage taken on deposits is more important, but at you build up your savings (usually after paying into your pension for 8-10 years), the amount taken for accumulation is much more important.

For this reason it is important to ensure that the fee structure on your policy reflects the amount you are earning as well as the amount you have already complied.

keren pensia meikifa hadasha: 6% deposits, 0.5% accumulation.  This is usually easy to bargain down to at least 2% & 0.2%

keren pensia clalit: 4% deposits, 1.05% accumulation.  These are also pretty easy to bargain down, to the same level as the Chadashah although people usually forget to ask about this.

bituach menahalim: 4% deposits, 1.05% accumulation (this refers to new policies the fees may be more on older policies – up to 2% for accumulation!).  In my experience, it is harder to bargain down the fees in bituach menahalim, although it is sometimes done.  Certainly when they company has leverage (ie pre-2008 lump sum money, pre-2012 policies with a fixed mekadem), then it is usually impossible to bargain down fees.

kuppat gemel: 0% on deposits, 2% on accumulation.  In my experience, I have found that, by just asking, the company will agree to reduce the fees to 0.9% and once you have a good amount of money you can bargain to lower it even more. 

Over the past few years a new trend has emerged where competition has driven down the fees for the kranot pensia to almost nothing, or so you think.  You see, in gambling the house always wins and there is no bigger casino than an insurance company.  The companies have basically used their ability to charge the client extra money to maintain their actuarial balance as a way to extract an additional fee on accumulation.  Now, this number is impossible to compare because it changes every year without your consent, but it leaves us with two important conclusions: (1) now you should really make sure to pay nothing in fees because you have to pay this additional “fee in everything but name” anyways.  Also (2) since bituach menahalim and kuppat gemel don’t charge for actuarial adjustments, the difference between their true fees and those of the kranot pensia is less than we mistakenly consider them to be. 

Regarding bargaining: As an insider, let me give you a huge tip – the number one reason that an agent or insurance gives a discount on fees isn’t because of a collective agreement or working in a preferential field.  The number one reason that insurance companies give a reduction is that the potential client asks for it.  No company agent is going to bring up giving you a reduction in fees because it works against his best interest, but once you broach the subject, he’ll see that you know what you’re talking about and immediately offer you a reduction.  It doesn’t even take hard bargaining skills, just asking.

When offering discounts on fees, insurance companies usually try one of two tricks

#1 – They’ll offer a bigger discount on the deposits, but not a significant one on the accumulation.  As I wrote above, in the long run, accumulation is the bigger deal, but most people ignore it since the percentage amount looks smaller.  Keep your eye on the prize and demand to pay no more than 0.25% accumulation.

#2 – They’ll give you a discount, but not tell you if will expire in 2 or 3  years.  They do this because they know you’re likely to forget, or when you are much older (in your 60’s) they know no other company will take you into their pension due to your health, so even if you do remember, they’ll deny your request and charge the maximum amount in the years when you have the most to lose.  This is why you need to review your pension every few years and re-bargain the terms.  All you need to do is call once every so often tell them to renew the discount and you’ll likely get it.  To put it into context, we’re talking about 15 phone calls you’ll make over the course of your life which will save you half a million shekels.

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