When superannuation funds are delivering strong returns, you don’t see much written about the costs of investments, including the costs charged to member accounts by super funds. When returns are poor however, fees become more obvious. Along with investment performance, can be an important factor in determining the size for your final retirement benefit.
Costs become more noticeable in a low return environment but high fees have an impact on super fund accounts in strong markets as well. You can have two super funds earning the same investment returns over a 30-year period, but one fund, let’s call it Fund A, charges 1% in fees while the other fund, Fund B, charges 2% in fees. This difference in fees can mean that the member account in Fund B will end up with a final benefit that is 20% smaller than a similar account in Fund A. For example, it could mean $320,000 in super rather than $400,000 in super, or say, $640,000 in super rather than $800,000 in super — an extra $160,000 in retirement can mean the difference between a reasonable, and a very comfortable retirement.
Calculating your fund’s fees
Your super fund is required to provide a warning in its product disclosure statement (PDS) about the impact of fees on your account’s long-term returns. Further, every super fund (except self-managed super funds) must include a fee comparison table in the fund’s PDS, which explains how much it costs to be a member of the fund. The comparison table is based on a fund’s balanced investment option, which is generally the default option for most super funds.
The comparison table must provide contribution fees (payable to commission-based advisers) and management costs in percentage terms, and also in dollar terms via an example. The example must illustrate the dollar cost of fees if you had a $50,000 account and made $5,000 a year in super contributions.
Your member statement — the summary statement you receive from your fund each year — must also disclose all the fees and other costs that affect your super account during the year. Your member statement must set out a ‘total fees’ amount, which represents the total amount of fees and charges that affected your account during the year.
For example, if your fund charges ‘total fees’ each year representing 2% of your balance, your fund has to earn at least 2% per cent to cover the fees. If inflation is running at 4 per cent each year, your fund has to earn more than 6% before it delivers a real return after fees. A real return is the fund’s return after taking into account the effects of inflation. Taking this example to its logical conclusion, if your target real return after fees is 7%, then your super account needs to deliver a 13% gross return (before fees and inflation) in order to deliver a 7% real return after fees.
Shopping for the best deal
The Investment and Financial Services Association (IFSA) and Rice Warner Actuaries released its latest Superannuation Fees Report in December 2008, providing Australians with a useful reference tool when comparing the costs of super funds. Note the expense rates appearing in the table below are average costs, and the fees charged by individual super funds may differ.
The table can be used as follows: say you have $50,000 in your super account. As a member of a corporate super fund you may be paying, on average, 0.73% of your account balance in the form of fees each year, which works out to be $365 on a $50,000 account balance. If your account balance is $10,000, your annual fees would be $73, or $730 if your account balance is $100,000. If your super is in a retail fund, you may be paying on average, 2% of your account balance in fees. On a $50,000 account, that works out to be $1,000 or $2,000 on a $100,000 account balance.
Comparison of fund fees Sector Fund Segment Expense Rate (%) Wholesale Corporate 0.73 Corporate super master trust (large)* 0.79 Industry 1.07 Public sector 0.69 Corporate super master trust (small) ** 2.12 Retail Personal superannuation 2.00 Post retirement 1.84 Retirement Savings Accounts 2.30 Eligible Rollover Funds 2.49 Small super funds Self-managed super funds 0.98
- *Excludes employer plans with less than $5 million in assets
- **Employer plans with less than $5 million in assets
- Source: ‘Superannuation Fees Report: December 2008. Prepared by RiceWarner Actuaries for Investments and Financial Services Association (www.ifsa.com.au).
DIY super and wraps
If you are running your super fund, or considering running your own fund, then you need to take into account set-up costs, running costs including buying and selling costs, and any advice you may need when investing and complying with the super rules. Many of the costs are fixed costs which means the size of your account balance is very important. Buying and selling costs are variable costs so the more trading that your fund does, the higher your brokerage costs will be.
A wrap, also known as a platform, may suit some individuals who want to have control over their superannuation investments but don’t want the hassle of worrying about compliance. The costs of wraps, also known as platforms, can vary widely but if you are dealing with a fee-based adviser who rebates any commissions, then, depending on the size of your account, a wrap can compare favourably cost-wise with a DIY super fund.
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[...] Check that the super account you plan to keep charges reasonable fees. Paying an additional 1% in fees over a 30-year period can reduce your final super benefit by up to 20%. For information on what the different types of funds charge in fees see article Feeding frenzy: super fund fees. [...]