Most of us are pretty savvy consumers in Australia – comparing petrol prices and energy costs is the norm, and many shop around for a good deal on mortgage rates.
But what about your ongoing superannuation fees? Do you actually know what you're paying your super fund?
One of the fundamental principles of investing is that it pays to minimise your fees. That makes a lot of sense because what you pay in fees and costs will ultimately reduce your returns to some degree.
Vanguard’s late founder John Bogle made this point powerfully when he stated: “Investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs; costs that ultimately overwhelm that magic.”
Generally speaking, the higher the fees you pay on your investments the greater the effect on your net investment returns.
The Australian Securities and Investments Commission (ASIC) requires all super funds to include the following consumer advisory warning in their product disclosure statements.
“Small differences in both investment performance and fees and costs can have a substantial impact on your long-term returns. For example, total annual fees and costs of 2% of your account balance rather than 1% could reduce your final return by up to 20% over a 30- year period (for example, reduce it from $100,000 to $80,000).
“You should consider whether features such as superior investment performance or the provision of better member services justify higher fees and costs.”
“You or your employer, as applicable, may be able to negotiate to pay lower fees. Ask the fund or your financial adviser.”
So, knowing how much you are paying in fees – whether they be administration fees, investment fees and costs, transaction costs, and other fees and costs– is really critical so you can make informed investment decisions.
Yet, when it comes to superannuation, one of the biggest single investments most of us have outside of our family home by the time we retire, many people are unaware of the various fees they are paying to their super fund provider.
There is a wide variation in the fees being charged by different super funds. In fact, the Federal Government’s YourSuper comparison tool shows some super funds are charging their members more than double the amount of annual fees than other providers.
What fees do super funds charge?
As noted above, understanding what you are paying in super fees is critical, and it’s a worthwhile exercise to compare them to those being charged by other providers.
Switching to a lower-cost super fund could potentially save you thousands of dollars in fees over the long term and result in you achieving a higher retirement savings balance than if you had stayed with your current fund.
Fees broadly fall into three main categories across most super fund providers; however, you should be aware that some providers can charge additional fees. It’s therefore especially important to check your super fund’s product disclosure statement (PDS), which detail all fees and costs.
The three main categories of super fees are administration fees and costs; investment fees and costs; and transaction costs.
1. Administration fees and costs
Super funds charge administration fees to cover the costs associated with administrating and operating your super account. These fees are often levied at a fixed percentage rate based on your current account balance.
2. Investment fees and costs
Investment fees typically relate to the costs involved in managing the investment options you have chosen within your super fund and may vary between different options. These can include investment management costs based on your asset allocations and costs levied by third parties. They are usually deducted from investment returns before they are applied to your account.
Some super funds also charge additional performance fees if their returns exceed a target level stipulated in their PDS. This is normally charged based on the percentage of the investment return achieved above the target level.
3. Transaction costs
Transaction costs are generally incurred as part of daily investment management activities to buy and sell underlying assets held by the super fund. They will also usually be deducted from investment returns before they are applied to your account and do not appear as specific items in your record of account activity.
Other fees and costs
Super funds also typically charge buy/sell spread to recover the cost whenever you make a contribution, withdrawal, or switch investment options. The buy/sell spread is the difference between the buying and selling of the underlying investments. The buy/sell spread charged depends on your investment option and the number of transactions you make.
Some super funds can also charge switching fees if you decide to switch between different investment options, such as from a growth to a balanced asset allocation strategy.
Insurance fees (for default death and total permanent disability (TPD) cover) will also apply unless you decide to opt out of the cover. These fees are generally payable on a monthly basis and deducted from your account balance.
Lastly, where personal financial advice is provided by a licensed financial adviser, advice fees can be levied and, with your consent, can be paid via a deduction from your super account.
While this may all seem daunting, and not easily understood, one way you can check on the total fees that you have been charged throughout the course of the year is to review your member statement.
Compare apples with apples
If you compare your super fees with those of other super providers it’s important to make sure you are comparing like for like, especially as different super funds tend to have a range of investment options charging different fee levels.
A good starting point is to check investment options that are closest to the allocations you have in your current super fund. You may need to investigate what other super funds are investing in, and their percentage allocations.
For example, if you have selected a balanced option through your current fund, aim to check for the same investment product options offered by other super funds.
Conclusion
Employers are required by law to contribute a set percentage of your salary into your chosen super fund, which is then allocated to your preferred investment option.
How your investments perform are not within your control, but there is one thing in investing you can control and that’s the fees you are willing to pay.
Even small differences in fees can have a big impact on your super balance over the long term.