Do noth­ing – and pay the price

Make sure high fees and poor re­turns don’t hit your re­tire­ment sav­ings

Money Magazine Australia - - SUPER - Vita Palestrant was edi­tor of the Money sec­tion of The Syd­ney Morn­ing Her­ald and The Age. She has worked on ma­jor news­pa­pers over­seas. Vita Palestrant

How eas­ily would you forgo $100,000 of a $500,000 super bal­ance purely be­cause of in­er­tia? When you get your an­nual state­ment, look at it closely. With such high stakes in­volved, a more ap­pro­pri­ate ap­proach might be that of a rot­tweiler with a bone.

“One per cent more in fees over a 30-year pe­riod can de­crease your re­tire­ment bal­ance by up to 20% – that’s a sig­nif­i­cant dif­fer­ence,” says Camille Sch­midt, mar­ket in­sights man­ager at re­search firm Su­perRat­ings. “It might not sound like much but that ex­tra 1% you are pay­ing is 1% less in your bal­ance, year af­ter year, com­pound­ing over a very long pe­riod of time.”

Sch­midt urges fund mem­bers to take a more foren­sic ap­proach to their state­ment and check the dif­fer­ent fees. “We say a to­tal fee that’s more than 1.4% to 1.7% of the bal­ance is get­ting into the ex­pen­sive range.”

The ta­ble pro­vides an ex­am­ple of how fees may ap­pear on your state­ment: the mem­ber fee; a per­cent­age-based ad­min­is­tra­tion fee, which cov­ers your fund’s op­er­at­ing costs; a per­cent­age-based fee for man­ag­ing your in­vest­ments; and a new item called in­di­rect costs. This new item is an ex­ist­ing cost that’s been carved out of the in­vest­ment fee as a re­sult of ASIC re­quire­ments. In­di­rect costs in­clude the cost of out­sourc­ing to other spe­cial­ist fund man­agers and var­i­ous trans­ac­tion costs.

The com­bi­na­tion of fees and costs vary across funds. “Some funds may not have any in­di­rect costs to dis­close or they may not charge a per­cent­age-based ad­min­is­tra­tion fee,” says Sch­midt. Fees can be ei­ther a dol­lar amount or a per­cent­age.

To make the ta­ble more con­sumer friendly, Su­perRat­ings has cal­cu­lated the dol­lar value of each fee. It’s some­thing New Zealand super schemes are now re­quired to do in an­nual state­ments so mem­bers can tell at a glance what their to­tal super costs are.

Re­turns are also im­por­tant. How do they com­pare with those of the top per­form­ers?

“The thing with bench­mark­ing per­for­mance is that you have to make sure you are com­par­ing the same time pe­riod and the same in­vest­ment op­tion,” says Sch­midt. “If your fund is well be­low what the top 10 funds are achiev­ing every time you look, then it’s prob­a­bly an in­sight into the fact they might be not the best provider for you.”

Funds are re­quired to pro­vide five- and 10-year per­for­mance numbers for MySu­per prod­ucts to en­sure there isn’t a fo­cus on short-term re­turns. This is yet to be ex­tended to other in­vest­ment op­tions.

Laura Men­schik, a fi­nan­cial plan­ner and direc­tor of WLM Fi­nan­cial, says that where per­for­mance is re­peat­edly be­low par you’d want to re­view it. “But chas­ing who­ever did the best re­turn last year is not nec­es­sar­ily the great­est strat­egy.”

She says it’s im­por­tant to look at super as the core of re­tire­ment plan­ning even if it’s 30 years away, and while mem­bers need to be aware of fees, it’s the over­all re­sult that counts. “You hope the fund man­ager is per­form­ing well and charg­ing a rea­son­able amount for their ser­vices, and if the man­ager charges a lit­tle more hope­fully they are adding more value – an­other 0.5% but only tak­ing an ex­tra 0.1% for it.”

Men­schik ad­vises check­ing your in­surance cover. “Young peo­ple may be pay­ing for in­surance they may not need or want. For older mem­bers, pre­mi­ums keep get­ting higher and tend to tick over un­less peo­ple take the time to an­a­lyse why they have it.”

Re­view your nom­i­nated ben­e­fi­cia­ries. Make sure you have a bind­ing nom­i­na­tion so your fund fol­lows your in­struc­tions, and re­mem­ber it needs to be re­newed every few years un­less it is non-laps­ing (only 20% of funds have non-laps­ing nom­i­na­tions).

Finally, if you re­ceive mul­ti­ple super state­ments it’s a sharp re­minder to con­sol­i­date your ac­counts and pro­tect your sav­ings from un­nec­es­sary fees. Make sure your fund has all your con­tact de­tails.

“It’s im­por­tant to check your nest egg,” says Sch­midt. “This is go­ing to be your re­tire­ment in­come so it’s im­por­tant to keep a han­dle on how much you have and work out whether you’ll have enough. If not, con­sider mak­ing ad­di­tional con­tri­bu­tions. Also check that your em­ployer’s con­tri­bu­tions are the right amount. It could be there is a data er­ror that could have a sig­nif­i­cant im­pact on your re­tire­ment.”

For the top 10 per­form­ers, see super rat­­perrat­ings-top-10.

To work out if you’ll have enough super, see moneys­ tools-and-re­sources/cal­cu­la­tors-and-apps/ ac­count-based-pen­sion-cal­cu­la­tor.

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