Q: I have my super with a major financial organisation. I’m wondering, are they a good company to be dealing with? I feel that their fees are a bit high: based on an investment amount of $300,000 the MER amount is $6,600 plus a monthly admin fee of $8.44. What are your thoughts on this matter?
I am not permitted to comment specifically on whether a particular super fund is suitable or not for your personal circumstances, which is why I have removed any reference to the company that runs your super fund. I can however provide some general comments on what makes a good super fund.
The purpose of a superannuation fund is to accumulate wealth for your eventual retirement, which means that you want your super fund to deliver the best return possible (after fees and taxes) taking into the account the risk that you’re willing to take to get there, and any other particular needs that you may have, such as cost-effective insurance coverage.
Comparing super funds in 8 steps
I explain the main issues you need to consider when comparing super funds in the SuperGuide.com.au article Comparing super funds in 8 steps. The two most important criteria when deciding whether a super fund is good enough is the super fund’s investment performance, and the fund’s level of fees.
The level of fees are an important consideration when deciding whether a super fund suits your needs, but the most important measure is your fund’s returns after fees and taxes. If your super fund is delivering higher returns than other super funds, or giving you access to investments that you wouldn’t normally be able to access, then the higher fees may or may not be justified.
The management expense ratio (MER) on your account works out to be around 2.2% of your account balance. In general, a super fund that charges substantially more than 1% in fees is considered a high fee super fund. According to rating company, SelectingSuper, if a super fund charges 2% in fees rather than 1% in fees, that 1% difference in fees over 40 years can mean a final retirement balance that is 30% lower, assuming investment returns are the same for both super funds.
Five main types of super funds
Apart from a self-managed super fund (SMSF), you have four types of superannuation funds – industry, retail, corporate or public sector – to choose from, and within these four large fund categories you can choose from a total of 389 super funds (based on latest information available as at June 2011, see Comparing super funds: who’s who in the super zoo). Generally you can only choose between an industry fund, retail fund, or an SMSF, unless you’re already a member of a corporate super fund, or an existing member of a public sector super fund.
Based on the level of fees that you are being charged, I assume you’re in a retail super fund. I explain the fees charged for the different types of super funds in the SuperGuide.com.au article FEEding frenzy: super fund fees.
Fees may include adviser commissions
Sometimes it is difficult to unpack the fees that a super fund charges, especially when you are a member of retail super fund. Due to the history of product distribution relating to retail super funds, it is highly likely that a portion of your fees is being redirected to a financial adviser who may have initially provided you with advice. Alternatively, you may be in a super fund that invests predominantly in international assets, or emerging markets, or other types of investments that require more
If an individual is in a balanced investment option, then I think being charged 2.2%-plus is over the top, and anyone in this position may consider renegotiating the fee with the organisation, or financial adviser. Note that I am not permitted to comment on the merits of any investment decision.
The level of fees is of course only one consideration when deciding the merits, or otherwise, of a super fund. Again, the most important factor is without doubt the after-tax returns that a super fund delivers over time.
Checking the performance history of your super fund, and comparing this history against comparable super funds may give you some comfort as to the merits of your super fund.
Other useful SuperGuide articles
The following articles also provide some information on this topic:
- Comparing super funds: Check out the cheapest funds
- Comparing super funds in 8 steps
- Super for beginners, part 20: Comparing your super fund’s performance
