Super charges: Susan Hely Fees explained

The more you pay now the less money you may have to fund your lifestyle in retirement

When it comes to the fees your super fund is charging, treat it just as you would a bank. It is standard practice to compare the fees your bank is charging on your accounts with what its competitors are offering, looking for the best deal. Well, it is time to do the same with your superannuation: understand what you are paying, what you are getting and look at what other funds are doing.

Just as you wouldn’t park your cash in a bank account with high fees, nor should you be in a super fund that charges top fees.

This is the advice from Kirby Rappell, research manager at SuperRatings, who has examined the fees of over 600 funds that collectively have $1.2 trillion under management.

Fees may look insignificant but over the long term they can eat away at your returns. In fact, because of the long-term nature of superannuation – stretching for 45 years from your first job to retirement – it is imperative to take notice of the fees. The less you pay, the more you have for your retirement.

Take, for example, a fee of 0.25% compared with 0.9%. It doesn’t look like much but over 30 years, for an account with a starting value of $100,000 and earning 6%pa, the balance grows to $438,976 if you pay 0.9%. But if you pay 0.25% you will have $532,899 – a difference of almost $100,000.

Fees range widely – anywhere from 0.3% to 2.85% for a balanced account in the SuperRatings balanced top 50. “You need to ask yourself, are you getting a competitive fee or not?” says Rappell. “You need to get a reasonable deal.” See superratings.com.au for top 10 returns plus fees on funds.

You don’t need to get the lowest fee but you need to understand what you are paying and what you are getting in return. Compare similar asset allocations when looking at returns.

In most instances there is no reason to assume that you get more if you pay more. For example, take these two funds with different fees. Both have a balance of $50,000.

The Super Directions fund run by AXA charges 2.85%, made up of an administration fee of $81 plus 1.9% and an investment management fee of 0.8% – that adds up to $1426 a year. With $746 million under management, it has returned 8.2%pa over five years. In contrast, Cbus charges 0.8%, with an admin fee of $78 plus 0.1% and an investment management fee of 0.7%, amounting to $498pa. Cbus returned 11%pa over five years.

Thanks for the $31bn

Australians have paid out $31 billion in super fees in 2016, according to research from Rainmaker Infor- mation commissioned by Industry Super Australia, which represents industry funds.

Of this, one of the biggest chunks – 27% or $8.4 billion – went to group insurance premiums, not personal insurance. Most fund members have life and total and permanent disability insurance and some have salary continuance insurance within their fund.

The next biggest fee – 26% or $8.1 billion – went to administration and trustee offices.

Investment managers earned $7.8 billion (25% of all fees). Financial adviser and entry fees and grandfathered ongoing trail commissions for pre-2013 advice earned $5.9 billion (19% of total fees). Some $400 million went to custodial services and $200 million to asset consultants.

As super assets grow, so too do the fees. This is because balances increase over time through contributions and investment earnings and most funds will have at least one percentage-based fee. As your account balance rises, the total dollars paid in fees will go up, says Rappell. “But the fees on a percentage of account basis should be consistent or going down,” he adds.

Fees on a constant $50,000 account balance have been falling over the past decade, he says. “Obviously this doesn’t account for the fact that average account balances are going up.”

Industry average fees on a $50,000 account fell from $728 in 2015 to $634 in 2016. This equates to a drop from 1.5% to 1.3%. For MySuper, where default employer contributions go, the median fund costs $519 for a $50,000 account balance. This equates to 1.04%.

But is this low enough? In the UK, a capped fee on default products is 0.75%.

Consultants Rice Warner believe there is scope for Australian super funds to provide better value for members, particularly as technology and scale kick in. “The sleeper is the growth of expensive choice funds sold on emotion, not value,” it warns.

Reforms slash costs

The good news is that the Future of Financial Advice (FOFA) reforms and MySuper, introduced in 2013, have helped reduce fees, particularly for the retail funds run by the big banks and financial institutions. Fees for already low-cost not-for-profit funds have stayed at about their average rate, fees for retail default funds have fallen sharply from 1.96% to 1.59% on average while personal retail funds have dropped from 2.39% to 2.05% according to Rainmaker.

As of June 30, 2016, the medium fee on a $50,000 account balance was $519. MySuper fees ranged from $215 to $777. The median fee for a retail MySuper account balance of $50,000 was $600. For choice products, the median fee for a retail balanced option was $768 while the industry median was $560.

The FOFA reforms stripped embedded adviser commissions from default workplace products, allowing retail MySuper products to reduce their fees by 50% on average, according to financial researcher Rainmaker.

Much of the reduction is due to lower administration fees, where adviser commissions were often previously paid, rather than falls in investment fees.

The average member in a workplace retail fund was paying 1.96% (assuming no corporate volume discounts) in 2012 but that same person, if they swapped into the average retail MySuper product, would one year later have paid only half that (1.01%). This is a direct result of retail workplace funds unbundling previously embedded advice commissions. “All group insurance commissions are banned as group insurance contracts are reviewed, updated and changed quite regularly,” says Alex Dunnin, executive director, research, at Rainmaker.

This reinforces the fact that about half the fees previously charged by retail funds to default workplace members was diverted to pay finan- cial adviser commissions. The changes have forced advisers to switch to fee-for-service portfolio fees while preserving ongoing trail commissions as much as possible for business that was written before FOFA’s introduction.

Who gets it all

Retail funds charge the most, receiving 50% of all fees. This is on assets that make up 29% of total super funds under management belonging to about 45% of members, according to Rainmaker.

Wealth management groups – this includes platform providers, investment managers, advice groups, insurers, consultants and custodians, including fees paid via self-managed superannuation funds – accounted for 91% of all super fees, or $28 billion, in 2016, according to Rainmaker.

Australia’s major banking groups, including the big four, Macquarie and AMP, receive 40% of all superannuation fee revenue. This amounts to $12.3 billion and is based on Rainmaker’s research that found these six institutions control 83% of the platform retail super fund market, 66% of the advice market, 22% of the asset consulting market, 42% of the group insurance market and 19% of the investment management market.

Financial advisers receive $5.9 billion in revenue with 40% estimated to be paid as fee for service, 20% as grandfathered ongoing trailing commissions, 22% as investment manager ongoing compensation and 18% as entry advice fees.