In the superannuation world there’s always a lot of talk that lower fees equates to more savings over the life of your super.
The Productivity Commission in it’s recent report on superannuation said that:
Higher fees are clearly associated with lower net returns over the long term. The material amount of member assets in high-fee funds, coupled with persistence in fee levels through time, suggests there is significant potential to lift retirement balances overall by members moving, or being allocated, to a lower-fee and better-performing fund.
We’ve emphasised the key part of that statement.
While it may seem obvious that higher fees will eat into overall returns, focusing on fees alone can be a simplistic view that overlooks important factors that impact investment returns. The PC report admits the relationship between fees and net returns is a contentious issue, often related to ‘active’ versus ‘passive’ investment management.
Many studies have been conducted over recent years and identified different factors and conflicting conclusions. Some of the factors that support the view that higher fees can in fact increase net returns include the long-term benefits of investing in illiquid asset classes (such as infrastructure) and the fact that higher risk (and theoretically higher return) asset classes are generally more expensive to invest in.
When choosing how to invest your super, or when it comes to reevaluating your super options, it’s also worth contemplating how you make your decision. If low fees are the key driver in your choice of super fund and type of super account, are they doing your savings any favours?
SuperGuide has been given access to some compelling data from industry analyst SuperRatings that suggests some lower fee accounts can produce lower returns too. Just because your fund has lower fees doesn’t mean that your net return will be better for it.
The difficulty, as ever, lies in predicting which funds will perform the best.
SuperRatings analysed the 10-year performance history of 177 superannuation funds where ‘net benefit’ was used to compare value. SuperRatings compared the 3 super funds with the lowest fees with the 3 super funds with the best performance on a net benefit basis.
In the table below, funds A, B and C are the funds with the lowest fees, and funds D, E and F are the funds that produce the highest net benefit.
Top 3 Lowest fees and top 3 best performance over a 10-year period
| Fund | Fees* | Fee Ranking | Earnings* | Earnings Ranking | Net Benefit* | Net Benefit Ranking |
|---|---|---|---|---|---|---|
| A | $4,533 | 1 | $56,981 | 72 | $52,448 | 42 |
| B | $4,852 | 2 | $46,970 | 153 | $42,118 | 107 |
| C | $5,097 | 3 | $54,909 | 96 | $49,812 | 61 |
| D | $9,806 | 102 | $72,349 | 2 | $62,543 | 1 |
| E | $6,988 | 47 | $69,256 | 8 | $62,268 | 2 |
| F | $8,146 | 75 | $69,629 | 5 | $61,482 | 3 |
Source: SuperRatings
*Fees, Earnings and Net Benefit are the aggregate amounts over the 10 year period to 30 June 2017
According to SuperRatings’ analysis the funds that charged the lowest fees generally showed underperformance in relation to their investment earnings. For example, Fund A which charged the lowest fees during the ten year period, produced investment earnings ranked only 72nd out of the total 177 funds. The combination of Fund A’s low fees and investment earnings only ranked 42nd on a net benefit basis.
The second and third cheapest funds ranked 107th and 61st respectively (out of 177) on a net benefit basis.
Conversely, the funds that produced the highest net benefit for their members did not have the cheapest fees. For example, Fund D which had the highest net benefit was ranked 102nd (out of 177) on the low fee scale.
The funds that ranked second and third on a net benefit basis ranked as the 47th and 75th (out of 177) cheapest funds.
The SuperRatings research made a strong case for looking at the bigger picture when choosing how to invest your super. There’s an argument for focusing on ‘net benefit’ rather than just the fees charged because a higher net benefit translates to more money in your account.
Kirby Rappell, Executive Director, SuperRatings commented that “Fees are not clearly correlated with value for money 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 a meaningful basis for comparison of fees and investment performance. Of course, when measuring overall value, consideration must also be given to broader issues including member services, administration capabilities, governance and insurance offerings, all of which can affect retirement outcomes.”
How does SuperRatings calculate the net benefit of a super account?
While it’s important to know what fees you’re being charged by your fund, it might be even more important to understand the net benefit of your super account. Fees are only one aspect of your superannuation investment – a cost or expense. In comparison, the net benefit is the position you’re left in when all costs and returns are taken into account.
SuperRatings explains net benefit as:
investment returns minus all fees and taxes.
Their analysis takes into account Superannuation Guarantee contributions, fees, taxes and investment returns over a ten year period, based on an opening account balance and salary of $50,000.