High commissions and competitive options

Are commissions and operating expenses in Latin America IRA pension funds too high? This question cannot be fully answered using only information that compares funds within the region. One comparison of operating costs and commissions that sheds light on the competitiveness of IRA systems in Latin American countries is made with mutual funds in the United States.

To develop a meaningful comparison we chose three large funds trading in the North-American market with different investment strategies. These resemble those available to IRA funds in LAC. The source is the found analyzer of the Financial Industry Regulatory Authority (FINRA), an industry regulator in the United States.

As seen in the table, we use an “emerging market bond fund”, which invests in the type of financial asset available in domestic markets in developing countries; a fund of bonds of large American corporations; and a fund that invests in long term indexes of US bonds. The operating expenses are four times larger in the first fund compared to the last, and commissions are more than four times larger.

These results show that the emerging market bond fund has operating expenses and fees & expenses in the low side of the range measured for Latin American IRA pension funds (that is, LAC-IRA funds are in most cases above 1%). However, the corporate bond fund and the US government fund operate at substantially lower costs.

There are non-trivial comparison issues before moving on to policy prescriptions. Mainly, the typical LAC-IRA fund has to perform some processes related to their role of social security funds that the funds in the table do not carry. On the other hand, the typical LAC-IRA fund has less competition and deposits are more regulated to reduce turnover. Some of these funds have collection functions, others do not. Also, LAC-IRA funds are sometimes linked with disability insurance.

Nevertheless, the comparison suggests there is some space for improving the competitive environment and reducing the commission charged to the final users (that is to the workers).