Mention a buy/sell spread and even the most interested super fund member will look a little confused. These super charges are one of the least understood costs of being a member of a super fund.
So just what are these mysterious charges and how do they work?
Every time you or your employer make a super contribution to your super fund, or you decide to switch investment options, or you receive a pension payment from your super fund, it costs the super fund money to buy and sell investment assets.
To help the super fund recover the transaction costs of buying and selling the investment assets in which your super savings are invested, they charge members a buy/sell spread.
What is a buy/sell spread?
Put simply, a buy/sell spread is the difference between the entry and exit price for an investment option in a super fund. These spreads also apply when you enter or leave an investment product outside the super system. Common examples of non-super investment products that use buy/sell spreads are bond funds or overseas share funds run by large investment management firms.
A buy/sell spread is charged each time a transaction requires your super fund to buy or sell investment assets (for example, shares or listed property) on your behalf. The super fund then retains the buy/sell spread you have paid and uses it to help pay for the transaction costs it has incurred in buying and selling.
Normal investment transaction costs incurred by a super fund include charges such as government tax and stamp duty on asset purchases and sales, together with the brokerage fees charged by share brokers.
The buy/sell spread applied to your super account is in addition to the normal investment and administration fees charged by your super fund.
Note: Not all super funds charge a buy/sell spread. Some only charge you the entry (or buy) price when you make a contribution into your chosen investment option, while others do not charge any buy/sell spread at all.
For more information about the main types of super fund fees you can expect to be deducted from your super account, see SuperGuide article: Comparing super funds: 10 fees and charges you need to know about.
How buy/sell spreads affect your super account
In most large super funds, there are different buy/sell spreads applying to each different investment option, and these buy/sell spreads are usually expressed as a percentage.
Simple investment options like cash or enhanced cash may have a 0.0% buy/sell spread as there are only minor transaction costs involved in buying and selling cash assets. Multi-asset choices like a MySuper Balanced investment option could have a buy/sell spread of 0.12%, while an Australian Shares investment option could have a buy/sell spread of 0.50%.
While buy/sell spreads vary significantly between different investment options (for example, between a conservative and high growth option), they also vary considerably among super funds.
Tip: As a buy/sell spread is applied each time you switch in or out of an investment option, you could be reducing your account balance unnecessarily if you switch investment options too frequently. Always carefully weigh up both the benefits and costs before submitting an investment switching request.
Warning: Changing your investment option can have significant implications, so it may be worth talking to your fund’s financial advice team, or a financial adviser, before making a switch. For more information about financial advice, including your fund’s financial advice team (or intra-fund advice), see the following SuperGuide articles:
- How to find low cost (or free) financial advice
- Seeking financial advice? A 5-step guide to obtaining expert help
- Super advice: How to find a suitable financial adviser
For more information about switching investment options, see SuperGuide articles:
- Investment performance: Assess your super fund in 4 steps
- Superannuation Investment Performance Reckoner: Discover annual returns for 5 investment options
- Superannuation investment: What is the difference between a balanced and growth option?
- Super control: how to switch your super account’s investment option
- Super pensions: choosing an investment option in retirement
Calculating a buy/sell spread
Most super funds use unit pricing to determine how much your super account is worth at any particular point in time. These units are similar to the shares you buy and sell in a company.
Each investment option in a super fund has a:
- Buy unit price. This is the price used when you invest in an investment option or your employer makes a contribution to your account. The number of units you are allocated is based on this price.
- Sell unit price – This is the price used when money is withdrawn from an investment option for an invest switch, or to pay a direct fee or insurance premium. The sell price is also used to work out the current value of your account balance.
The buy unit price and sell unit price are normally calculated by the super fund on the day your transaction request is processed. The difference between these two prices forms the buy/sell spread. For more information on unit pricing and super funds, see SuperGuide article Investment returns: Does your super fund use a crediting rate or unit pricing?
Finding your super fund’s buy/sell spreads
In most large super funds, the buy/sell spreads for each investment option are listed in its product disclosure statement (PDS) and published on its website.
Buy/sell spreads are regularly reviewed (often annually), but may change if transaction costs increase unexpectedly, for example in bad investment market conditions, when markets may not be as liquid.
Although super funds list their current buy/sell spreads in their PDS, the cost to your account for each transaction where a buy/sell spread is applied is not itemised on your member statement. The buy/sell spread is deducted when the unit price is calculated at the time a transaction is completed (for example, switching an investment option or drawing a pension payment).
Note: Since 30 September 2017, super funds are required to report their fees and costs differently. The changes were introduced to make the information received by super fund members more accurate and easier to compare across different funds.
Buy/sell spreads: a fee in disguise?
The key point to understand about buy/sell spreads is that they are charged by super funds to ensure fund members joining or leaving the super fund, or joining or leaving an investment option, help pay for the transaction costs their decision generates.
They also help ensure the other members of the super fund or investment option, who are not joining or leaving at that time, are not disadvantaged by your decision.
Most super funds believe buy/sell spreads are a fair way of allocating the investment costs generated by members making investment switches, contributions and withdrawals. Buy/sell spreads are not paid to the super fund, rather the money is used to cover external transaction costs, and are viewed as a way to ensure the individual member pays for the cost of investment-related services undertaken on their behalf.
Note: If your super fund offers a investment option where you make direct investments into assets such as Australian shares or term deposits, buy/sell spreads are usually not applied. However, you will pay activity fees to recover the transaction costs involved of making those direct investments.
For more information about super fund fees, see the following SuperGuide articles: