Think you're in a low-fee super fund? Think again
New research by Vanguard Australia shows that one in three Australians has never reviewed or compared fees across funds.
But take a look at the fees your fund charges and it's a fair bet you're paying a lot more than expected.
Super funds often promote their 'low' administration fees. The catch is that funds can (and do) charge a whole raft of fees, something six out of 10 Australians are unaware of, according to Vanguard's study.
Fees can quickly stack up
No one is suggesting that super funds shouldn't earn a fee for managing our retirement savings. So, yes, your fund will charge an annual administration fee. This can be made up of a flat yearly fee plus a percentage based on your account balance.
You may also be charged:
• An investment fee
• Performance fees on your super investments
• Transaction fees, such as brokerage, relating to your super investments
• A buy-sell spread that covers the difference between the buying and selling price of investments when you make contributions, withdrawals or switch your investment options.
The exact fees you pay will vary between funds. Some don't charge buy/sell spreads, for example.
Even so "Australians will be shocked to find out how much is being drained from their retirement savings through fees", says Daniel Shrimski, managing director of Vanguard Australia. Potentially more shocking is how difficult it can be to know exactly what the fees are.
Know what you're paying
'Low fees' are a common marketing point across funds, making it easy to assume you're getting a good deal. The simplest way to know for sure is to read your annual member statement - all of it. Information about the full extent of fees paid, including fees coming out of your investments, may be tucked away towards the back of the report.
Clear disclosure of fees is part of the challenge facing working Australians when it comes to choosing a super fund. While funds must follow strict disclosure rules, these only apply to formal documents, such as a product disclosure statement (PDS) or your MySuper dashboard.
"When it comes to how fees are presented on websites, social media and in advertising, there is no consistency. It's confusing, unclear and impossible to compare," says Shrimski.
"By keeping fees confusing, it's taking advantage of the low engagement and financial literacy of Australians when it comes to their superannuation."
Super funds collectively pocket significant sums in fee income each year.
A Federal Treasury report shows Australians are paying more than $30 billion a year in super fees - way more than the $27 billion spent on energy bills or the $12 billion spent on water bills. By 2034, it is estimated that figure could be $45 billion.
It's safe to say that if super fees came out of our hip pockets, more Australians would sit up and take notice. The trouble is, they don't. Fees are deducted from our super savings so we don't feel the pain today, but we will certainly feel it in the future.
The Productivity Commission estimates that an increase in fees of only 0.5% can cost a typical full-time worker about $100,000 by the time they reach retirement.
What's the solution?
The Moneysmart website has an online calculator for working out the impact of fees on long-term retirement savings. The drawback is that for the calculator to deliver meaningful information, you need to know exactly what your fund's fees are. This is where the challenge lies.
Vince Scully, founder of financial advice service Life Sherpa, agrees it is important to look carefully at any ongoing fees, and fees that are deducted from your contributions. However, he adds: "Don't focus too much on the fees that you're only going to incur occasionally.
Be especially careful about fixed administration fees. These seemingly innocuous fees can be a material part of the total cost of your fund, especially if your balance is low. That $1.50 a week fee is 0.5% on a $15,600 balance and is not taken into account when reporting returns in most cases."
Scully admits that identifying the different fees involved can be a slog.
"It is difficult to find them all," he says. "If you are in the default MySuper product, they are usually all together. As soon as you go beyond this, you will usually need to visit a few documents."
Shrimski is keen to see the industry move towards communicating a transparent combined fee that members pay rather than only citing one type of fee. To this end,
Vanguard Super presents a total fee on a yearly basis on its website, making it clear that this incorporates the investment cost, administration fee and transaction costs.
"It's simple, easy to understand and fund members can clearly see what they're being charged," says Shrimski.
See where your fund sits
One strategy to know how your fund ranks for fees is to use the YourSuper comparison tool on the website of the Australian Taxation Office. It offers a table of MySuper accounts where funds can be ranked by fees. Personalised data is available if you view the tool through your MyGov account.
For the record, the YourSuper tool shows Vanguard Super ranks third cheapest for fees, with annual fees totalling $280* on a MySuper balance of $50,000. It's worth noting that the funds ranking first and second are not publicly available funds or have restricted offerings.
At the far end of the spectrum, the YourSuper tool reveals there are eight funds that charge more than $600 in annual fees on a $50,000 balance.
Again, not all of these are open to the public. Nonetheless, members of those funds could be paying close to $400 more than necessary in annual fees. Over time, that fee drain will really add up.
The bottom line is to take a few minutes to know the fees you are paying. A small investment of time could leave you a lot better off in retirement.
If you can't find fee information online or in your annual statement, pick up the phone and call your fund. If you're not happy with what you're paying, rest assured that the one fee you can't be charged is a switching fee to move to a new, lower-fee fund.
This report is sponsored by Vanguard. It was independently researched and written.
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