How To Choose a Pension Plan – Part II / By Shuki Stauber

this article is the second half of a conversation with yaakov zlotnik, a seasoned retirement consultant, about ways to choose a pension plan that fits the employee’s needs and how to go about making the selection.

click here to read part i of “how to choose a pension plan”

how do you choose a company pension plan?
the employers and the workers’ committees determine the parameters they want the pension fund to meet and we assess the funds, conduct negotiations and decide which is best suited to insure them.

but we said that today every employee can choose the fund and the plan that’s right for him, so how can a given workplace offer the entire staff a single pension plan?
buying a group plan brings the size advantage to the fore, like in every purchasing process. this way the employees have stronger negotiating power when dealing with the pension funds. when an organization brings a large number of insured employees the pension fund will be willing to provide a range of benefits, e.g. lower management fees (which increases the amount of the pension the employee accrues) and/or an especially high level of service. examples of higher standards of service: once a year a fund representative has to hold an individual meeting with every employee to match the pension terms based on changes in family status. another example: the pension fund has to hold an annual gathering for the employees to present regulatory changes that took place in the past year and their ramifications for the employees. an example of this kind of regulatory change is amendment 3 to the provident fund law, which went into effect january 1, 2008.

retirement consultant yaakov zlotnik

that means you create group power within which every worker can choose the plan right for him.
correct. the employees receive information about what they receive from the fund as a result of the agreement signed between them and the pension fund and the employer and committees, and they can request a personalized account.

and what if an employee does not want to be insured by the fund the employer and the committees choose?
he’s entitled to switch to another fund, of course. but that is a real rarity because what reason would a worker have to forfeit the advantages he gains as a part of a large group?

you keep mentioning workers’ committees and management. are there also other organizations you provide consulting to that don’t have a workers’ committee?
at most of the organizations where i’ve provided my services, i was hired jointly by the committee and the management. as a rule employees have more confidence when the selection of the fund is done in collaboration with the committees, which are their representatives.

there is one organization that i advise that does not have a workers’ committee. at this organization i made a point of being the one who sent the information to the employees as an authorized pension consultant. of course i noted that it’s possible to meet with me in order to set up personalized accounts, and a number of such meetings did in fact take place.

in my opinion most of the employees don’t even know they can choose a pension plan suited to their own needs. most of them think it’s a uniform, set framework.
you’re right. that’s a big problem and it’s good that you’re writing about it. employees putting away [pension] money should be made aware that they have options to choose from.

with all of their good intentions to provide good service the pension funds might have an interest in perpetuating a lack of awareness, because if every employee wants a personalized account it will rob them of a whole lot of energy.
true enough.

do all of these options for changes and personalized accounts apply to those who are insured by longstanding pension funds as well?
[a new pension fund member cannot join the longstanding pension funds, which are now closed and only involved in giving payments to those who are eligible. the reform in the capital market created the new funds and worsened the savings terms for the old pension funds. nevertheless in many cases the savings terms at the longstanding funds is still considered better than the terms people insured through the new funds are entitled to. the various benefits members of the old funds were entitled to was one of the main reasons for the enormous actuarial deficit created in them. this deficit is what set the reform into motion.]
no.

since the terms are better than with the new funds, those who are insured under these plans should enjoy what they have and keep quiet?
not exactly, because with those funds as well there are absurd situations that are not found at the new funds. i’ll give you two examples: at a new pension fund, even when the pension holder reaches retirement age, he’s asked which payment plan he wants to receive based on his circumstances, i.e. whether he’s married or not. at the veteran fund there is no such option.
another example: at the new fund the pension holder is able to choose a track so that if he passes away his heirs will receive the money left in his account. on the other hand, with the old fund if the pension holder leaves work and passes away two months later and doesn’t have a wife [meaning no eligibility for survivors’ payments has been created because there are no survivors (assuming his children, if he has children, are already adults)], all of the money he saved over the years goes down the drain.

but that’s what the regulations for the longstanding funds determined.
correct.

they can be changed.
but they’re not being changed.

because the deficit created by the longstanding funds has to be funded, and this is one of the ways to accomplish that.
you said that, not me.

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what else is important in choosing a pension fund, besides financial strength and financial performances and the level of service you discussed earlier?
we also talked about management fees, and we could also add in the fund regulations and the demographic balance [i.e. the composition of members] of the fund.

are there significant differences in the demographic balance at the new funds?
some of the new funds are a continuation of the veteran funds, so there are differences that emerged over the years that trickled down to them, too. for example, it used to be that many blue-collar workers were insured at mivtachim, and today as well many of them are at the new mivtachim. on the other hand makefet belonged to the clerks’ union and therefore it had a relatively larger number of white-collar workers. it’s the same at the new makefet fund.

how important is the demographic balance as a factor in choosing a pension fund?
generally speaking it’s a component that has an effect on the fund’s total strength. after all, the new funds are also mutual funds. that means if in a given year fund members had more incidents of death and handicaps than anticipated it affects the financial performances, which in turn affects all of the members. during that year everyone’s earnings will be reduced. if 20 members were killed during the lebanon war and the fund pays for every incident of death, including war, then the rights of the other members will be reduced.
but it doesn’t work in only one direction. if there’s an actuarial surplus it gets distributed to the other members.

and does all this have a real effect on the fund’s stability? 
i agree that the demographic structure doesn’t have to be a central factor in choosing a pension fund. it’s an additional element. that means if there are two fund that are alike in every other aspect this parameter could be used to decide which to choose.

so you’re declaring the new makefet is the best pension fund. it’s large and stable, it has good service and it has the “right” combination of white-collar workers.
i disagree, because on the other hand you could claim the standards of service at the new makefet are less than at the new mivtachim. [the latter is the only pension fund with branches around the country, which can affect the level of service it provides members since many of them want to speak with a service representative fact-to-face.] so in any case the pension holder has to decide what his priorities are. the consultant’s task is to help him weigh all of the parameters in accordance with his needs before reaching a decision.

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how much does it cost for a private individual to use your services?
pension consultants charge nis 700-800 + vat for a one-time meeting.

how many pension consultants are currently working in israel.
i don’t know. many of them work at banks.

if there are consultants at the banks and customers can use the service for free, why would someone come to you for private consulting?
it does cost money at the banks. the banks receive from the fund the employee signs up for 0.25% of his accrued savings.

but they receive money from the fund, not from the pension holder.
who do you think the fund takes the money from? the consultant has him sign a form to receive ongoing pension consulting and based on this the bank receives his fee.
i don’t provide ongoing pension consulting, but only at points in time that are relevant for the pension holder.

the fund charges 0.5% for management fees anyway, and gives the bank half of that amount. that means in any case the pension holder is paying management fees; if he goes to you rather than to the bank’s consultant he has another cost – your fee.
i bargain with the pension fund over the level of management fees the worker pays. my ability to negotiate with the fund makes it possible to transfer those management fees [the 0.25% charge paid to the bank if the pension consultant is a bank clerk] to the pension holder.

from what you’re saying it sounds like if you succeed in helping the pension holder cut the management fees in half the employee saves a substantial amount, which is already enough to justify paying your fee. this kind of arrangement isn’t available through the bank.
that’s right. and another important thing is that another reform is scheduled to take effect soon, which will allow monetary transfers from capital plans to payment plans. this is a complex issue that requires thought and advance consulting before reaching a decision.

for the hebrew article