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Hands up if you know what fees your super fund charges? No idea? You’re not alone.
Most super fund members are aware that being in a fund with superior investment performance will mean a bigger retirement balance. One of the key findings of the Productivity Commission report on super was the negative effect being in a dud fund can have on your retirement balance.
The Productivity Commission found:
“…being defaulted into a single top-performing MySuper product would lift the retirement balance of the median 55-year-old by up to $61,000 when they retire, compared to being defaulted into two underperforming products. For a new workforce entrant today, the gain would amount to $407,000 by the time they retire in 2064.”
What’s not so well known is the impact of fees.
Your super fund might have above average investment returns, but if it charges above average fees you could retire with less money than someone in a fund with similar returns but lower fees.
Even small differences of 0.2% or 0.5% may feel trivial now, but the impact on your retirement could be far from trivial, due to the effect of compounding over long (multi-decade) timeframes.
The mathematics of compounding works in the same way for fees as it does for returns, except fees subtract from your final wealth, rather than add to it. So it pays to know exactly what fees you are incurring within your super or pension fund, and form a judgement as to whether they represent value for the member services, support, insurances (where applicable) and returns you are getting from your fund.
The first step in understanding how fees may impact your final super benefit is to know what fees and charges you are paying. This can be a complex task, as the range of fees can vary, depending on the type of fund you are in, whether you hold insurances or pay for financial advice from your super.
In total, there can be up to ten different fees and charges applied to your account. Some are periodic and some one-off (such as family law related requests), some based on a percentage of your account balance (such as investment fees), others are flat-fee based (often administration fees) and some may be a hybrid of both.
An example of how fees affect superannuation balances
Let’s look at David, a hypothetical 30-year-old who intends to work until he is 65. David earns $85,000 per year, on which his employer contributes super guarantee payments at the legislated rate.
David decides not to salary sacrifice into super, nor does he make any non-concessional contributions throughout his working life. He also elects not to hold any insurances within his super fund and does not receive any advice that might result in fees being deducted from his account balance.
The key fees and charges David pays over time will be dominated by the investment fees on the investment option(s) he chooses, plus periodic administration fees, which we will assume are levied at $1.42 per week, for a total of $74 per year.
Let’s assume David invests in a diversified growth-biased option within his fund, and that option generates a return of 7.5% annualised, before fees and charges, over the remaining 35 years until he plans to retire.
The final critical factor that will influence David’s final balance is investment fees. We will use the median fees for a $50,000 balance on a growth fund, outlined in our article on super fund fees, and compare this with the minimum and maximum fees for this investment option.
Using ASIC’s MoneySmart superannuation calculator, the table below outlines the retirement balances for David as he turns 65, across the three different investment fee scales.
A $50,000 starting balance, plus super guarantee contributions, for 35 years:
|Projected super balance at 65
(in today’s dollars)
|Difference relative to average fee
|Difference relative to average fee
The results in the table above demonstrate the impact of investment fees on net investment returns; that is, the assumed 7.5% annualised gross return less each respective investment fee above.
These net returns are what you receive in your account. When compounded over 35 years, the differences are clearly significant to final retirement balances.
Using the MoneySmart superannuation calculator
To see how your current salary, super balance, contribution arrangements and desired retirement age may be impacted by fees and charges, check out the MoneySmart superannuation calculator here.
The calculator allows you to input your key figures, and then either accept the default assumptions for fees, charges, returns and tax on earnings, or alter them to match your current (or expected) experience of your super fund.
The calculator also allows you to compare the result of your fund with an alternative fund.
Some tips on returns and investment fees
When comparing funds and fees, it’s important to compare like with like. The level of fees will depend on the investment options you choose and your account balance, as well as your choice of fund. If you’re comparing two super funds, make sure the investment option you have selected in each one has a similar percentage allocated to growth and defensive assets.
Don’t, for example, compare the investment fee on a Balanced option of one fund against the investment fee on a High Growth option of another, as the latter will have a higher allocation to asset classes than may be more expensive to manage. Consequently, it’s likely that the headline investment fee will be higher too.
Investment returns on superannuation options are always reported net of investment fees (and relevant taxes). If you view your annual statement and it reports a return of 8.2% for the year (as an example), that figure is the net return, after the deduction of investment fees incurred during the year.
In the ‘David’ example earlier, we used a gross return of 7.5% annualised for all the projections, and then applied three investment fee scales to arrive at the differing projected balances at retirement. So be careful when using a superannuation projection tool not to double count investment fees by using an option’s net returns and then further deducting investment fees from these.
You may overcome this issue by adding back the relevant investment fee to your option’s long-term investment performance, to arrive at an approximate gross return equivalent when using the MoneySmart superannuation calculator.
The best place to find your super fund’s fees is in the Product Disclosure Statement. Look for ‘Section 6: Fees and costs’ and check ‘ongoing fees and costs’ in the summary table. These are the costs for the default investment option. If you’re not in the default, you may need to refer to a separate investment guide to find the investment fees that apply to the option(s) you have chosen, or call your fund to find out.
Important notes and assumptions
ASIC’s MoneySmart superannuation calculator is a handy tool for projecting super balances and identifying the impact of varying contribution levels, investment options and associated fees and charges. It is, however, based on a set of assumptions that you should be aware of, the key ones being:
- Inflation (as measured by the CPI) rises by 2.5% each year
- A further 1.5% rise each year occurs due to the cost of rising community living standards
- The results are thus shown in ‘today’s dollars’, effectively discounted at 4% each year
- The default investment return is 7.5% each year before investment fees and tax on earnings (that is, the ‘gross return’)
- An effective tax rate of 7.0% is applied
- It is assumed that the fund has your TFN and applies tax accordingly
- Administration fees of $74 per year (in today’s dollars), charged mid-year and increasing with inflation each year
- Contribution fees are $0 each year
- Investment fees are 0.85% each year
- Indirect costs (the indirect cost ratio) are $0 each year
- Advice fees are $0 or 0% each year
- Insurance premiums are $214 in year one, rising with inflation each year.
A full list of the assumptions (and their explanations) underlying the projections can be found at the bottom of the calculator and it is recommended you review these when using the tool.