We all know that we should be saving more for our retirement, but how much does it actually cost to invest in super, and when are we paying too much?
In recent years, industry super funds have used the subject of fees and charges at the centre of their marketing campaigns to the Australian public. With the catchphrase “run only to profit members”, television advertising by the industry fund heavy weights illustrates in graphical format the impact of fees on the super balances of two individuals. Obviously, the industry super fund comes out on top, with their member have a much larger pot to spend in retirement.
Whatever your personal views of these scare tactics, there can be no doubt that industry funds are forcing people to take notice of how much their superannuation fund actually costs to run. Unfortunately, it can be very difficult to compare like with like. While there are a number of standard fees charged by all super schemes, there are also variations on how these are calculated and some funds may have additional costs, or name their charges differently.
Fees which you may be charged include a monthly membership fee, administration charges, an investment management fee, establishment fee, switching fee, expense recovery … the list goes on. Super schemes may also refer to their MER, or management expense ratio. This is usually all the costs of investment bundled together, and then divided by the total assets of the fund.
This charge is not paid by each individual account, but is deducted from the investment earnings before they are allocated to each member. While you may not pay it directly, it still comes out of your super savings. This may provide a good barometer of how much your super investments costs, but again, fund providers may calculate this differently.
But the most important issue to look at, according to Christopher Butler, managing director of the Heron Partnership, is the total of any ongoing fees being charged. He says: “Ignoring any fee paid to a finance adviser for advice, industry funds on average charge around 0.07%-1.0% of super fund assets, and retail products charge about 1.5%-2.0% of members’ assets. However, there are significant variations.”
Managing director of Super Ratings Jeff Bresnahan says there is a basic rule of thumb when it comes to paying fees. “Members with around $100,000 in super should not be paying a combined total of more than 1.5% of assets, while those with in excess of $100,000 should not be paying more than 1% in total. This means the total of the member, administration and investment fees should as a percentage of assets not exceed these figures.”
There are also a few fees which should set your alarm bells ringing, or at least prompt you to ask for further information. The first of these are exit fees, which the majority of funds no longer charge. Originally designed to discourage people from moving from one scheme to another, some older super schemes still have these in place, and they can be hefty as they are based on a percentage of assets.
Bresnahan says any exit fee today should be a fixed amount of around $80 or less, irrespective of your account balance. He also adds: “If people see the words ‘contribution fee’ on their member statement, they should run a mile!” Charges to switch investment options should also be considered with caution. Butler says that funds offering best practice arrangements will provide unlimited investment switches at no cost.
With greater competition in the super marketplace, you would hope to see fund fees becoming lower, but unfortunately this isn’t the case. Butler says: “Although some funds have reduced their fees overall in recent years, there has been an increase in fees, principally driven by additional marketing costs in a chose of fund environment, more sophisticated investments structures and more complicated administration requirements.”
Bresnahan concurs, saying: “In 2005/06 fees went up by 7% and in 2006/07 they went up a further 10%. The increases reflect the higher compliance costs and increased levels of marketing.” Bresnahan believes these rises will continue, but he also questions the fees being charged by sections of the investment management industry. “For example, does it cost twice as much to manage the investments of a $100,000 account as it does for a $200,000 account?”
As a means of assisting Australians who wish to compare funds, the Australian Securities and Investments Commission (ASIC) now offers an online super fund fees search facility, as well as a comparison worksheet which allows you to compare a range of fund features, such as insurance and investment options. There can be no doubt that even a small difference in fund fees can have an enormous impact on your savings in retirement, so it makes sense to take the time to make the necessary comparisons between funds. As ASIC warns, paying just an extra 1% each year in fees could mean that you lose up to 20% from your retirement benefit over 30 years.” It certainly can pay to shop around.