Massive Differences Between Pillar 3a Funds

The ongoing negative interest environment has been driving up the popularity of investing with pillar 3a retirement funds every year. This trend has also been encouraged by Swiss banks, which have upped their spending on promoting the advantages of pillar 3a funds. We have also witnessed the launch of numerous new retirement funds with high stock components. Unlike pillar 3a savings accounts, these have the ability to deliver yields even when interest rates are negative.

But how good are Swiss retirement funds, really? In order to answer that question, independent Swiss online comparison service moneyland.ch studied 85 retirement funds (these are listed in the PDF comparison available at the foot of this article).

This is what retirement funds cost

The total costs of using a retirement fund are a deciding factor because they detract from future performance. “A comparison of all applicable fees is important,” reiterates moneyland.ch CEO Benjamin Manz.

In order to find these figures, moneyland.ch calculated the total cost of investing 100,000 Swiss francs over a 10-year term with each individual fund. In addition to the total expense ratio (TER), possible custody fees, sales charges, flat fees, and deferred sales charges were also accounted for in calculations.

The results of the moneyland.ch study show that the average cost across all included retirement funds is 1.08 percent per year.

But there are huge differences between individual funds. The total cost of investing 100,000 francs over a 10-year term with the most expensive fund is 17,400 francs, or 1.74 percent per year. Other funds have total costs of just 2300 francs (2.3 percent per year) for the same investment and term.

Passive retirement funds are cheaper

Actively-managed funds cost 1.17 percent, on average. The average cost of passively-managed funds is just 0.76 percent. “Passive funds are generally much cheaper, and therefore preferable to active fund,” recommends moneyland.ch analysts Felix Oeschger.

Passively-managed retirement funds also perform better, on average. Actively-managed funds rarely manage to achieve the exceptional returns needed to compensate for their higher costs.

Swiss retirement fund performance

In addition to costs, moneyland.ch also analyzed the performance of Swiss retirement funds – accounting for TER costs - across 1-year, 3-year, 5-year and 10-year terms, each ending on October 31, 2021.

The results show that the higher the stock component of a retirement fund is, the better the fund performed across the studied periods. The simple explanation is that stock markets have performed similarly well across all of those time frames.

It is important to understand that historical performance is not a key criterion for choosing a retirement fund. “Key factors in choosing retirement funds are your personal risk tolerance and the total costs,” says Oeschger.

In past years, the 85 retirement funds included in the studied delivered average performance of 14.5 percent. The worst-performing fund achieved a negative -1.2 performance, while the best-performing fund had positive performance of 41 percent.

For the 3-year term, performance ranged between -2.6 and 54.9 percent, depending on the fund, with the average across all funds being 20.5 percent. For the 5-year term, the average performance was 24.1 percent, with the performance of individual funds ranging between -4.4 and 58.9 percent.

Figures for the 10-year term are the most revealing. The average performance across all funds during this term was 51.7 percent. The worst-performing fund had negative -6.3 percent performance, while the best-performing fund had 88.2 percent performance.

For the sake of comparison, the performance of the Swiss SMI stock market index over the same terms was 30.1 percent (1-year), 47.7 percent (3-years), 81.9 percent (5 years), and 192.2 percent (10 years).

Two steps for finding the right pillar 3a fund

The sheer number of funds available leaves many investors feeling confused, and they turn to advisors for help. But choosing the right retirement fund for your pillar 3a or vested benefits does not have to be difficult.

Firstly, you need to consider how large a stock component you want, as this defines the investment strategy. The higher the stock component is, the bigger your returns will be – but short-term losses in value will also be bigger. A fund made up entirely of stocks is riskier over the short term. But over long investment terms of ten years or more, the risk steadily decreases as the term progresses – as long as the fund is well diversified. For that reason, using a fund with a large stock component is recommended if you will leave your money invested for at least ten years.

Secondly, once you have chosen your stock component, you need to find the most affordable fund which matches your investment strategy. In most cases, the pillar 3a funds offered by your bank will not be the cheapest available. That is why it pays to run an independent comparison. You can simply use the interactive retirement fund comparison on moneyland.ch to quickly and easily find the cheapest fund for the stock component you want. Another option is to use digital retirement asset management services, as these are often very affordable.

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