Default funds and multiple providers: High costs and no added value?

Gordon Gekko

Frequent Poster
Hi Colm,

An interesting article.

You are right regarding lifestyling, but in this context you were right not to go down that particular rabbit-hole. The target market here are people with no existing provision, and moving from nothing to a lifestyling fund would at least represent progress.

It does sound overly complex in terms of the platform and I wonder whether 0.5% is actually fair to the providers; lots of small amounts equals lots of admin.

Colm Fagan

Frequent Poster
Hi Gordon

Firstly, I hope you didn't mind me using your "guy in an attic" comment as the hook for my last "Diary of a Private Investor" update. You asked a valid question. It merited a thoughtful response, which I tried to give. Unfortunately, I didn't get the discussion I was hoping for: the investment professionals ducked the challenge. There's still time for them to respond!

It does sound overly complex in terms of the platform
I don't know if you're talking about my proposal or about lifestyle/ default funds. Lifestyle/ default funds are definitely far too complex: the NEST scheme in the UK has 49 default funds for pre-retirement, one for each future retirement year, plus another 3 funds. Each has to be priced daily. They have no fund offering for post-retirement.

My proposal, on the other hand, is the essence of simplicity. I am proposing just one fund, for pre- and post-retirement. The same "interest rate" will be credited to everyone. It will be calculated completely mechanically and will only need to be declared once a quarter, because the rate will vary only by a small amount from one period and the next. I can tell you now for certain that, irrespective of financial conditions when the fund is launched, the "interest rate" in the first year will be around 4%, net. It won't vary much thereafter. That's a wonderful reassurance for people who worry about the risk of stock markets (and property markets) falling. It also makes members' accounts simple to administer: they'll be just like post office accounts.

Posting on another forum this morning, one of my friends praised my use of the word "inanity" to describe default funds. He quoted the dictionary definition of inanity: a useless thing, a vanity, a silly object. Dead right!