This article shall show what you need to consider when comparing securities solutions in pension products. We will go into all the common cost factors and we will explain what they comprise.
What are the cost components and how can they be understood?
Before we start, we would like to point out that there are almost no limits to creativity when it comes to charging fees. Although providers have the obligation to inform you about their prices, but it is up to you to demand complete transparency.
Product costs: Total Expense Ratio (TER)
Let’s start with the TER, the Total Expense Ratio. It shows the costs of fund management that are charged directly to the fund assets.
This cost factor can be found in the factsheet of the investment fund. It is called the operating expense ratio (BAQ) at UBS and the operating expense ratio (TER KGAST) at Credit Suisse. Other fund providers call it “running costs” or “flat-rate costs”.
In addition “management fee” or “administration fee” can also be found in the factsheets of the pension funds. However, these two designations do not usually include the entire product costs.
If the used the fund invests in other funds, it is called a umbrella fund. In the case of an umbrella fund, additional costs must be taken into account because the sub-funds also incur costs. However, these costs may not be included in the TER of the umbrella fund.
According to the guidelines of the Conference of Managers of Investment Foundations (TER KGAST), the costs of the sub-funds in the umbrella fund only have to be disclosed if they account for more than 10% of the net assets of the umbrella fund. Furthermore, the guidelines are not binding. They only apply if the TER KGAST is reported. The cumulative TER is also named as the synthetic TER.
LINK: A comprehensive comparison of the fees (TER) of pension funds can be found here.
Distribution fees: Issue- and redemption commission
This commission is applied when you buy or sell the fund shares. It is often published in the form of a maximum percentage and can be up to 5%.
Metaphorically speaking, this means that you start with a handicap of up to 5%. This handicap is not shown in the performance of your portfolio, as the fee is deducted before the investments are purchased.
If you have the investments liquidated, in some cases up to another 5% will be deducted from your pension assets. In the worst case, you will have to achieve a return of more than 10% just with the issue and redemption commission until you get into the profit zone with your investments. Of course, this is not a good starting position.
However, there are also offers that do without issue and redemption commissions. The issue and redemption commission is usually used to compensate the distributor (partner). It is sometimes also referred to as an issue surcharge or redemption discount.
Fees on the purchase and sale of foreign currencies
Currency transactions have the same effects as issue and redemption commissions. If you buy a fund in another currency, for example USD, your bank will buy US dollars first. When you buy the US dollars, you will pay the bank a rate which is often one percent higher than the mid-rate.
When you sell the funds again and exchange the US dollars back into Swiss francs, the bank earns again because it gives you a worse rate. Maybe you know this situation from exchanging foreign currencies for the vacations.
ÜBERSETZUNG Dilution protection: Issue and redemption spreads
The issue and redemption commissions should not be mistaken for the issue and redemption spreads. The spread is the LINK: margin between the buy and sell price.
The case is obvious, if there is a note in the factsheet next to this percentage «LINK: remains within the fund» or something similar. This entails that the fee is not a charge to cover the costs of fund management.
The spread then serves to ensure that existing fund holders are not disadvantaged by their addition to the fund. The whole thing is called anti-dilution protection.
The dilution protection briefly explained:
- When you invest money in a fund, the fund must buy additional shares of the securities held. Depending on how liquid the securities are, there is a higher or lower spread between the buying and selling price. The costs, which are generated between buying and selling investments, are passed on to the persons who invest in the fund, i.e. to you. With the dilution protection, you do not pay any salaries of fund managers, but you only bear the costs which are caused by your entry into the fund. The spread costs of the purchased securities are passed on to you.
Moreover, equities often have a lower spread than bonds thanks to their higher trading activity (liquidity).
Other transaction costs
Other possible cost components are broker commissions, stock exchange fees and stamp duties. Commission fees are charges levied by banks for the processing of stock exchange transactions. They can be fixed as a flat rate (ticket fee) or as a percentage of the transaction volume. In addition, there are stock exchange fees which, depending on the bank, may or may not be passed on to the customer.
The federal stamp duty (officially called turnover tax) amounts to 0.075 % for domestic securities and 0.15 % for foreign securities (per contracting party). It is due when securities are bought or sold. In contrast to ETFs, domestic index funds are not subject to stamp duty, as they are not traded on the stock exchange.
Custody and foundation fees
Last but not least, providers of pension solutions often charge a custody fee for the safekeeping of the securities invested. They credit the dividends and periodically send a performance statement. In some cases, an endowment fee is also charged, since only endowments can be providers of pension solutions. The foundation fee can be divided into a percentage and a flat-rate component.
The performance fee is based on the performance of the fund. It is particularly common in alternative investments such as hedge funds, but can also occur in strategy or equity funds in exceptional cases. This fee is charged if the fund shows a positive performance in a predefined period.
Pension assets are generally tax-free. Nevertheless, taxes may be levied if investments are made in foreign securities.
Dividends and interest are subject to a tax deduction at source. LINK: It is worth investing in funds that can reclaim withholding taxes.
Note: This list does not claim to be comprehensive. The article is limited to the common cost components of securities solutions in pension plans.
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