A while ago I posted about the Dutch retirement system, and how you can save money for retirement in three different pillars.
This is an article about optimising my pillar two savings, the employer’s retirement account.
Default Retirement Funds
My employer and I put money into a pre-tax retirement account. The retirement company then invests it until my official retirement age. At that age, I can use the money to purchase a monthly payment for the rest of my life.
The retirement account invests your money according to two choices. The first decision is to let the management company invest your money, or to invest in an allocation of your choice. The second decision is either how much risk you want to take (when they invest for you), or which funds to invest in (when you invest).
If you don’t make a decision, the default is the management company investing the money for you in a neutral risk profile.
The funds they invest in with the neutral profile are:
- NN First Class Return Fund I – N
- NN Liability Matching Fund (M)
- NN Liability Matching Fund (XL)
The first thing I did was switching to the offensive profile, where they invest in just one fund for you:
- NN First Class Return Fund I – N
The problem with this fund is that even though at first sight the TER or total expense ratio is not that high (0.40%) they invest in a random set of other funds. To me it seems there’s no logic behind this.
The NN fund invests in 48 other funds and shares. See the top 10 positions below.
|Asset Name||% of Total Assets|
|NN (L) Global Sustainable Eq Zz Cap EUR||17.44|
|NN (L) Emerg Mkts Hi Div Zz Cap EUR||10.77|
|NN (L) Global Real Estate Zz Cap EUR||7.62|
|NN (L) Commodity Enhanced Zz Cap EUR H i||6.35|
|NN (L) Alternative Beta Zz Cap EUR H i||6.24|
|NN (L) EmMkts Dbt (LclBd) Zz Cap EUR||5.30|
|NN (L) Global Hi Yld Zz Dis EUR H iii||4.36|
|NN Euro Credit Z||3.74|
|NN (L) Em Mkts Dbt Hrd Ccy Zz Cap EURH i||3.49|
This top 10 makes up 67% of the total assets of the fund.
A few things come to my mind. First of all, I immediately see that most of the assets are in other NN funds. If you look them up, they’ll look super cheap with TERs of 0.01%. That seems super cheap, but I suspect there are a lot of hidden costs involved.
I do think that most of these funds are actively managed, which would imply transaction costs and a lower return, since most active managers cannot outperform index funds.
The diversification within the fund seems very odd to me. Maybe I have the luck of managing a very small portfolio, where the NN fund managers are managing almost 30 billion euros in this fund. There definitely is a drag when managing multi billion euro portfolios, however, that doesn’t mean that the managers should invest in all kinds of crazy funds. Why couldn’t they just invest in broad market index funds?
In this fund, I see that they invest in both sub funds (equities, debt, commodities), and individual securities.
The Microsoft stock is even in the top 10, with 1.74% of assets invested in this one share! On top of that, the largest sub fund (sustainable equities) contains Microsoft stock. Within that fund, that makes up 17% of the main fund, Microsoft is the largest investment (4.9%)! That means that weighted, Microsoft makes up not just 1.74% of the NN fund, but 2.59% (0.85% comes from the 4.9% of 17.44%).
Now within a diversified portfolio, say the index tracking ETF VWRL Microsoft makes up 1.85% and the largest share is Apple at 2.42%. These percentages aren’t that rare, but I just think it’s odd to have an asset allocation like this. It seems that it is not designed with my best interests in mind, but with those of NN. Of coure, this makes sense. I do understand that NN has to make money. I’m just worried that so much people participate in these schemes through their retirement accounts without knowing what’s going on.
That’s the reason I’ve been digging deeper, and figured out I can invest in individual funds myself.
My New Retirement Fund
When you log in to your retirement account, you can change the way your money is invested. Either you can change the asset allocation, or choose to invest yourself. When I chose the latter option, I got presented a list of funds to invest in.
As you can see, even when you choose for your own asset allocation they are pushing the expensive NN funds really hard. Can’t blame them for trying to make money…
On the second page (the shorter list), third option from the bottom, we see the only viable index tracking product.
This iShares fund is an index fund that tracks the world wide developed markets equities and invests in approximately 1,600 securities for a TER of 0.17%. Yea baby, that’s what I’m talking about!
Obviously, this seems to be the candidate for my retirement portfolio. Next to it, I would like to have a fund that invests in emerging market equities.
I’m not interested in bonds, as I’m currently 25 and the earliest I can liquidate this retirement account at approximately 71 years old… Perhaps there are possibilities to get to this money earlier but 71 years is my official expected retirement age.
Back to emerging market equities. In this list I see a couple funds that claim to invest in EM shares. The problem is that they are all either very expensive (close to a 1% TER), very narrow (only a couple dozen of securities, or both).
Both reasons are good enough for me to not invest in these funds. Above all, I should have the possibility to diversify my portfolio in a cheap way. That would’ve made my retirement account a lot more diversified, because do expect emerging markets to show a lot of growth in the next few decades.
In conclusion I moved my entire pre-tax retirement account from the standard NN fund to the super cheap index tracker from iShares. That means that 100% of my pre-tax money is now in equities, in slightly more than 1,600 securities from the developed world.
As soon as NN offers a proper EM tracker, I will invest 15-20% into that one, and keep the remainder in the iShares developed world product.
When I get older, I might consider adding bonds to the portfolio too. For now though, looking at the ultra long lock up period, I will go with 100% equities.
My post-tax strategy will not change soon. I’ll continue to put money away with 50% in equities and 50% in cash to eventually buy an investment property.
How does your retirement account look like?