Fees: Do cheaper super funds mean bigger retirement balances?

Countless reports have been published stating that super fund fees are too high, and that the super industry needs to work harder on lowering administration and investment fees. We all love a good deal and don’t want to pay more than we have to when saving for retirement. Are super fund fees now lower, and is it a good thing for your retirement savings?

Ratings agency, SuperRatings has conducted some interesting research investigating whether the cheapest super fund is the best option longer term. After studying 162 super funds over a 10-year performance history, SuperRatings CEO Adam Gee states: “In the majority of cases, the funds with the lowest fees do not necessarily provide a better retirement outcome or return for its members.”

This finding may be surprising for many, including this writer, who believes that, other variables being equal (when comparing funds with similar investment returns before fees, and similar services), then it should mean that the cheaper the better. The general wisdom is that the lower the fees, the more money that will be directed to your retirement savings.

An interesting finding from the study is that some super funds are charging higher investment fees than they should on passively managed investment options (investing in accordance with an index which keeps costs low, rather than using a more expensive investment style, such as stockpicking). The passively managed options may charge cheaper fees than actively managed options, but some super funds are charging comparatively high investment fees for a passive option. I explore this finding in more detail later in the article.

SuperRatings CEO, Gee states: “Fees are, at best, only loosely correlated with value and any assessment of a superannuation fund should be made using a broad range of criteria, with ‘net benefit’ (investment returns less all implicit fees and taxes) being the only meaningful basis for comparison of fees and performance.”

The study conducted by SuperRatings focuses on ‘net benefits’, and Gee further explains that the “analysis takes into account Superannuation Guarantee contributions, fees, taxes and investment returns, over a 10-year period, based on an opening account balance and salary of $50,000. Table 2 later in the article compares ‘net benefits’ with the lowest fees.

Fees: How much do super funds cost?

Before we explain the difference between ‘net benefits’ and low fees, it is worthwhile understanding what a typical super fund costs nowadays.

The average cost of a super fund account fell by 8% across the industry, and more specifically, fees on a $50,000 account have fallen from an average cost of $728 (1.46%) down to $667 (1.33%). See Table 1 below.

The average fee of a MySuper account is $520 (1.04%, on a $50,000 account balance), which is $147 or 22% cheaper than the average cost of a super fund across the sector, according to SuperRatings. See Table 1 below.

What is a MySuper account? Since 1 July 2013, super funds have been able to offer a superannuation product called MySuper. Since 1 January 2014, if you have not actively chosen your super fund, then, your employer’s SG contributions have been paid to a MySuper account. A MySuper product has a single diversified investment option, a minimum amount of life insurance cover, and standardised disclosure of fees. According to the federal government, MySuper is “ a simple, low coat default superannuation product called MySuper to improve the simplicity, transparency and comparability of default superannuation products.”

Table 1: How much do super funds cost?

Source: SuperRatings media release dated 27 April 2015, but percentage columns have been added by writer, Trish Power.

Note: For the cheapest super funds in the super market, see SuperGuide article Super fees: Top 10 cheapest funds in Australia.

Study: Why lower fees can mean lower returns

According to SuperRatings, while lower fees can improve returns for fund members, the ratings agency is concerned about HOW some of the fee cuts have been achieved.

“In a number of cases, fund managers have moved their entire portfolio from being actively managed to a fully passive, index approach, with investment returns simply aiming to replicate the underlying indices, in a virtual race to the bottom based on fees,” explains Gee.

SuperRatings is concerned that these passive portfolios could be “substantially impacted during volatile markets and market corrections, with no facility to manage asset allocation or stock selection, to the detriment of members”.

The move to index (passive) investment has created a suite of super funds that should, in theory, provide similar returns and charge similar fees, given they are passively managed and move in line with the index, says SuperRatings.

The study has found that fees differ markedly between the various passive investment options, ranging from 0.038% of funds under management (FUM) and 1.34% of FUM.

Important: In the opinion of SuperRatings, the investment fees for passive management of a balanced investment portfolio (60% to 76% growth assets, and typically the default investment option for fund members) should be no more than 0.05% to 0.1% of FUM. This investment fee does not include the administration fees charged by super funds.

Gee notes: “We are concerned that substantial profits are being made by some funds charging excess investment fees for their passive investment products. Whilst we believe there is a place for passive investment products, they must be appropriately priced to ensure that the net benefit to the member is reasonable and competitive.”

Are the cheapest super funds the best performers?

According to SuperRatings, the top 3 cheapest super funds over the past 10 years did not measure up in terms of investment performance (see Table 2 below). Note that the cheapest super funds over 10 years are not necessarily the same funds that appear in our top 10 cheapest super funds article referred to earlier.

SuperRatings compared 3 super funds with the lowest fees, with the 3 super funds that delivered the best performance over the 10-year period. See Table 2 below.

Using Fund A in Table 2 as an example, SuperRatings highlights the fact that Fund A charged the lowest fees over the 10-year period, but produced investment earnings that ranked the fund 96 out of 162 super funds. Combining the low fees and ho-hum investment performance, Fund A ranked 41 on a ‘net benefit’ basis.

Using Fund F in Table 2 as another example, SuperRatings explains that Fund F delivered the highest ‘net benefit’ (1) but was nowhere near the cheapest super fund (ranked 78 out of 162 for fees).

The moral of the story is simple: fees are just one component when choosing a super fund, and investment returns after fees and taxes are the main game when aiming to accumulate a healthy retirement balance.

Even so, the findings from this SuperRatings study are food for thought when next reviewing your super fund for fees, investment performance and other offerings (such as insurance costs).

Table 2: Low fees vs best performance over 10-year period (cumulative)

*’Fees’ and ‘Earnings’ and “Net benefit’ are the aggregate amounts over the 10-year period.

Source: SuperRatings media release dated 27 April 2015.

September 4, 2015 by Trish Power 4 Comments