Savings can take a hit
In response to consumer, political and regulatory pressure, the fees members pay to super funds (for both administration and investment) have come down significantly in recent years. However, excluding insurance premiums, we still pay a whopping $30 billion-plus in fees each year and, based on a recent Productivity Commission report, high-fee products remain embedded in the super system.
While retail funds generally remain the biggest fee collectors, they too now offer low-fee options. As a result, the fee gap between retail and industry funds has narrowed considerably.
Fees are charged as a percentage of funds under management (your assets) and as a general rule most super fund members pay between 1% and 1.2%. While many funds charge much less, there are currently 2 million accounts (worth $127 billion) that remain in what are called legacy products – old-style funds, typically closed to members and paying commissions to related-party businesses – which, on average, charge around 2.2%.
Having spent the past three years studying competition and efficiency in super, the commission concluded that super products that exceed 1.5% are high fee. In other words, if your annual statement shows you’re paying more than $1500 annually for your fund to manage a $100,000 balance, you’re paying too much and you should consider looking for a cheaper option. Clearly, the lower the super balance the greater the impact that fees will have on fund performance.
Best of both worlds
While Kirby Rappell, executive director of SuperRatings, urges fund members to check fees, cheapest isn’t always best. The opposite is also true, with 80% of actively managed funds, which tend to charge higher fees, struggling to outperform the index.
Nevertheless, Rappell reminds members that while a key driver of outperformance is access to alternative asset classes such as infrastructure, emerging markets and hedge funds. They’re typically not cheap. “You’ll find that funds accessing these types of asset classes tend to be at the top of the performance tables,” he says.
But given that many of the top-performing funds also have fees below 1%, Xavier O’Halloran, head of advocacy, Superannuation Consumers’ Centre, at Choice, reminds investors that it’s also possible to have the best of both worlds with low fees and strong performance.
Based on the commission’s definition, a little under a fifth (17%) of super money, comprising $275 billion across four million accounts, is within high-fee retail funds. It found that funds charging higher fees tend to deliver lower returns after fees are taken into account.
Admittedly, while some retail funds do well, most have below-average net returns, which the commission concludes is prima facie evidence of fees driving persistent underperformance. Over time, higher fees can cost your fund dearly, with ASIC’s numbers suggesting that a 1% difference in fees can lead to a 20% difference in the value of a balance over 30 years.
Rappell also warns super fund members to watch out for the exit fees that are charged on around 60% of accounts. While non-profit and retail funds charge a modest fixed fee, others can charge exit fees as a proportion of assets.
Rappell also advises members to watch out for buy/ sell spreads – an added impost for changing the underlying investments in a fund – and trailing commissions for financial advice, which Productivity Commission research suggests can still be charged even when no advice is delivered. “You need to know that buy/sell fees exist,” he says. “Understand what impact they would have, and avoid making unnecessary changes to your investments within super in an attempt to try to time the market.”