Funds not offering value for money

PICTURE PI this, you get a bill in the mail — $3850 for ‘investment ‘in services rendered on your super fund’.

Across the country, every ad adult is also sent a similar bill, wi with the amount varying de depending on the size of their su super balance. Some people, of often the poorest workers, get th three or four bills because th they have their super in three or four funds.

That’s effectively what’s ha happening in Australia, only it’ it’s hidden because your super fu fund doesn’t invoice you. In Instead, they take it au automatically from your super account.

Still, can you imagine the outcry if these bills started arriving in people’s letterboxes?

It would be front-page THE LOWEST COST BALANCED SUPER FUNDS news. There would be protests in the streets.

And then I’d stoke the outrage by saying:

“It gets worse! You’re not getting value for money. Over the long run, 90 per cent of these super funds fail to beat the basic market averages.”

As billionaire investor Charlie Munger once said, “Show me the incentive, and I’ll show you the outcome”. Well, the Royal Commission into the Financial Services Industry is a fascinating case study of an industry with the wrong incentives.

Former treasurer Peter Costello understands incentives, and he’s angry about the financial outcomes for workers. That’s why at a super conference last year, he argued that the Government should take compulsory super out of the hands of bank-run retail funds and union-backed industry super funds, set up its own fund and incentivise fund managers to bid for the business — lowest fees wins.

In America they’ve had stunning success with the Thrift Savings Plan (their equivalent of our super), which is administered by the government. Fees are as low as 0.03 per cent. So let’s compare the two. We’ll use a typical Aussie earning an average wage over their 50-year working life, in a balanced fund earning 4 per cent pa after inflation. The difference is fees: the Aussie fund charges 1 per cent, the Thrift Savings Plan 0.03 per cent.

After 50 years, the balances would be: Aussie fund $728,668, Thrift Savings Plan $977,120. That’s a difference of $248,452.

The reality is that the industry – which has siphoned off $230 billion in fees since 2008 – has no incentive to be as thrifty as the Thrift Savings Plan. Why? Because Aussie customers are unengaged – they’re defaulted into their super fund by their employer, and a percentage of their wage is automatically poured into the fund.

So, given the industry is unlikely to change, it’s time we kept the bastards honest by highlighting the cheapest super funds. Bottom line? Always question the incentives of the people managing your money.

After all, there’s no interest like self-interest!