Opinion – From Grain to Grain: Two factors to consider when choosing your pension plan, before the administration fee

When an investor evaluates a pension plan or investment fund, one of the first concerns is the management fee. This should not be the initial focus. There are two other factors that need to be evaluated before comparing rates.

I don’t know if the reader usually goes to free fairs. I go every Sunday morning here close to home.

At these fairs, there are several stalls selling various fruits. In these stalls, you can find papaya, mango, avocado, pineapple, peach, plum and others.

Do you agree with me that each of these fruits has a different price? Prices vary not only with the type of fruit, but also with the quality.

The same occurs with investment funds and private pension plans. The rates for these vary with the asset class of the provident fund and with quality.

There are referenced fixed income, active fixed income, low volatility multimarket, high volatility multimarket, referenced equity, active equity and balanced pension funds. These are some of the asset classes within private pension funds.

You will also agree that when you go to the fair to buy papaya, as you planned to make a papaya cream, you will hardly return home with pineapple, as this one was cheaper than the first one.

When you go to buy a fruit, first you choose the type of fruit, then you evaluate its quality and only then will you compare prices within these characteristics. You’re not going to buy a mashed papaya just because it costs 50% of a nice, firm one.

The same selection process should be used in reviewing and selecting your pension plan. Cost is the ultimate tiebreaker, not the initial ranking element.

Following the analogy, first, you must select the asset class of the provident fund you want to invest in. For this, you can consider the diversification of your investment portfolio and your personal characteristics, such as your investor profile.

For example, if you are a conservative investor and already have a portfolio made up only of CDBs referenced to the IPCA, you can diversify the index by investing in a fixed income pension plan referenced to the CDI.

After selecting the asset class, you need to assess the quality of the products within this category. The quality criterion involves performance, risk, the management team and its investment processes.

After selecting those funds of the same class that you are looking for and that stand out in the quality criteria, then it’s time to ask: how much does this papaya cost? Or rather, what is the administration fee for these products?

If you change the order in the evaluation, you can leave with a product that is not suitable for you and that lacks quality, just because it had a lower rate.

Michael Viriato is an investment advisor and founding partner of Investor House

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