Free employer contributions v poor fund selection

Oompa_Lumpa

Here is a thread which will hopefully kick off a discussion.

The general concensus by the knowledagble posters on here is that you should contribute as much as is needed to max your employer's contributions. However, if the fund choices are poor (as illustrated by a recent posting in this forum) would you actually be worse off by investing your contributions (plus your employer's) into poor funds than you would by investing in "best in class" funds?

For example, if the employer's contribution was 3% if you contributed 3%, under any circumstances would it be more worthwhile for you to forgo the employer's contributions and just invest your 3% in excellent funds?

I know in the short term it wouldn't make sense, but wonder if over a lengthy time period with compounding whether the lesser contributions with good performance would beat the greater contributions with poor performance?

Of course the best of both worlds is that you could take the employer's contributions and invest those and yours into the funds of your choice rather than the crappy range of funds that you will probably get the choice to invest in, but then we don't seem to get the choice to be able to do that.

EdInvestor

Of course the best of both worlds is that you could take the employer's contributions and invest those and yours into the funds of your choice rather than the crappy range of funds that you will probably get the choice to invest in, but then we don't seem to get the choice to be able to do that.

Good point.

Group SIPPs are now available for company pensions - Standard Life offers them I know and low cost providers are happy to provide them as well. The problem is usually the IFA who is in charge of the GPP. Lobby your pensions dept to provide the option. With an occ sceme, complain to the trustees if the funds are no good.

dunstonh

The general concensus by the knowledagble posters on here is that you should contribute as much as is needed to max your employer's contributions. However, if the fund choices are poor (as illustrated by a recent posting in this forum) would you actually be worse off by investing your contributions (plus your employer's) into poor funds than you would by investing in "best in class" funds?

You should get the maximum free money you can but you shouldnt go beyond that. So, a 3% plus 3% would be fine but if you want to add more personal money which will not be matched, then you should look to a better alternative.

If the employers option only offers say a UK Equity fund, then you do that with the employers scheme with your own additional contributions, you utilise other sectors.

The poor fund choice doesnt mean that what you have available is going to perform badly. Using that other thread, 9 of the funds covered just 2 areas.

Group SIPPs are now available for company pensions - Standard Life offers them I know and low cost providers are happy to provide them as well. The problem is usually the IFA who is in charge of the GPP. Lobby your pensions dept to provide the option. With an occ sceme, complain to the trustees if the funds are no good.

Why is the IFA the problem? SIPPs are currently non regulated and the FSA are issuing warnings left, right and centre over SIPPs. They have recently issued concerns over group SIPPs. The average person hasnt got the skill or knowledge to utilise a SIPP and to enforce a group SIPP on those type of individuals could easily lead to a mis-sale.

Oompa_Lumpa

dunstonh wrote:

You should get the maximum free money you can but you shouldnt go beyond that.

So there are NO circumstances where you shouldn't avail of the max employer contributions (presuming you can afford the employee contributions obviously)?

What about a skin flint employer who contributes something like 1% if you contribute 4%. Surely if the fund choices were awful you would be better off passing up on the 1% so that your 4% could be invested most efficiently.

(BTW, I don't know the answer just trying to expand on the "always take the max employer contribution" line that pops up on these threads)

dunstonh

What about a skin flint employer who contributes something like 1% if you contribute 4%. Surely if the fund choices were awful you would be better off passing up on the 1% so that your 4% could be invested most efficiently.

There is rarely a scheme that is truely that awful. We need to consider that a UK Growth fund is not awful. It is limited and a contribution of 4+1% into UK Growth is not awful. Putting your full 15% into UK growth is. So, you put 4+1% into that UK growth fund and the other 10% into other sectors.

Oompa_Lumpa

dunstonh wrote:

There is rarely a scheme that is truely that awful. We need to consider that a UK Growth fund is not awful. It is limited and a contribution of 4+1% into UK Growth is not awful. Putting your full 15% into UK growth is. So, you put 4+1% into that UK growth fund and the other 10% into other sectors.

Can I ask another question then?

If you have a fairly balanced portfolio (a bit of UK equity, property, fixed interest, US, Far East, Europe etc) how much per year would you expect the average return of the worst investment manager (ie an insurance company's pension funds) to be behind a similar portfolio consisting of JPM, Invesco etc, (basically what you would choose if you had a free rein)?

Would it be 5% or more?

dunstonh

You cant tell. Most of the funds that were in the top 100 ten years ago are not in the top 100 now.

Long term performance is something like 90% down to sector allocation, 5% for individual fund choice, 1% on charges and 4% on luck.

A sector average medium risk porfolio invested 5 years ago (just before the stockmarket crash) would have returned in excess of 10% a year average. Most people would be happy with double digit returns in a 5 year period which includes a major stockmarket crash. The top funds in each sector would have seen returns in excess of 20% but what are the odds of being best in each sector?

I know what you are saying but you would need to know what the best funds are going to be in advance of investing in them.

Oompa_Lumpa

dunstonh wrote:

Long term performance is something like 90% down to sector allocation, 5% for individual fund choice, 1% on charges and 4% on luck.

Wow, I didn't think that sector allocation would be 90% of long term performance. I really thought that fund choice within the sectors would have been a huge part in the performance.

I think that in itself, anwers my questions

EdInvestor

Long term performance is something like 90% down to sector allocation,

If we'd only known :rolleyes:

We wouldn't have picked all those rubbish With profits and balanced managed funds, would we?

:cool:

dunstonh

If we'd only known :rolleyes:

We wouldn't have picked all those rubbish With profits and balanced managed funds, would we?

1 - Hindsight is a wonderful thing.
2 - We didn't have the tools to know this at consumer level in the past
3 - With Profits did fine for 150 years. No-one could foresee the changes that would virtually kill it off.
4 - investment funds that are available on the various tax wrappers today weren't available years ago to the same degree.