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While fees grab the headlines, the common assumption that lower fees equate to a bigger nest egg on retirement is simplistic and often wrong.
The Productivity Commission (PC) 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 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.
As you can see from SuperGuide article Super and pension funds with the lowest fees, the list is dominated by passively managed index funds. These funds track the index of one or more markets or market sectors. They are cheaper than actively managed funds because there is less investment management involved. But as their returns are pegged to the market, they can never perform better (or worse) than the markets they track.
Higher fees can increase returns (but not always)
Studies have shown that higher fees can in fact increase net returns due to, among other things, the long-term benefits of investing in illiquid asset classes (such as infrastructure) and the fact that higher risk (and potentially 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. Behavioural finance has taught us that loss aversion leads us to weigh potential costs more heavily that potential rewards.
If low fees are the key driver in your choice of super fund and type of super account, do you risk missing out on potentially higher returns in the long run?
SuperGuide has been given access to some compelling data from industry analyst SuperRatings that suggests some lower fee accounts can produce lower returns too. But, and it’s a big but, just because your fund has lower fees doesn’t necessarily mean 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 212 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, B and E are the funds that produce the highest net benefit. You will notice that Fund B scored the quinella, that is, it had the second lowest fees and the second highest net benefit rank. Yes Virginia, there is a Santa Claus.
Top 3 Lowest fees and top 3 best performance over a 10-year period
|10 yr net benefit
|Net benefit rank
Source: SuperRatings. *Fees, Earnings and Net Benefit are the aggregate amounts over the 10 year period to 31 December 2020. Rankings are based on Balanced options (defined by SuperRatings as having 60% to 76% growth assets).
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 10 year period, produced investment earnings ranked only 97th out of the total 212 funds. The combination of Fund A’s low fees and investment earnings only ranked 39th on a net benefit basis.
The second and third cheapest funds ranked 2nd and 7th respectively (out of 212) on a net benefit basis. Which goes to show that low fees may explain part of your net returns, but they are no guarantee.
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 99th (out of 212) on the low fee scale.
The funds that ranked second and third on a net benefit basis ranked as the 2nd and 11th (out of 212) cheapest funds.
The SuperRatings research makes 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 says: “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 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 (that is, all costs and expenses) are only one aspect of your superannuation investment. While the net benefit is the position you’re left in after all costs and returns are taken into account.
SuperRatings’ analysis includes Superannuation Guarantee contributions, fees, taxes and investment returns over a 10 year period, based on an opening account balance and salary of $50,000.