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When it comes to super fees, you get what you pay for
Want to know if your super fund represents good value? If so, it’s important you understand the different types of fees you’re paying.
All things being equal, lower fees are better than higher fees – but all things are rarely equal, so it’s simplistic to assume the fund with the lowest fees must be the best.
That would be like saying that the cheapest car is always the best, without considering factors like safety, reliability and efficiency.
A super fund that charges very low fees might, indeed, be a good fund. But it might also:
- Take excessive investment risks
- Provide lacklustre long-term returns
As a result, this sort of ultra-low-fee fund might leave members with less money at retirement than a fund that charged higher fees and delivered strong, stable, long-term returns.
What fees can super funds charge?
Superannuation funds may charge a range of fees, including:
- Administration fees may be charged for managing your account
- Investment fees may be charged for managing your investments
- Indirect cost ratios may be charged for using external providers to manage your investments
- Switching fees may be charged when you change investment options
- Buy/sell spread fees may be charged when you make contributions, switch investment options and withdraw money
- Contribution splitting fees may be charged when you transfer some of your super to your spouse
- Advice fees may be charged when you receive personal financial advice
- Exit fees may be charged when you leave your super fund (although super funds will no longer be able to charge exit fees from 1 July 2019)
Fees matter – but so do investment returns
One way to understand how fees impact your superannuation is to play around with ASIC’s superannuation calculator.
By changing different variables, you can see how different fee structures affect your nest egg.
For example, let’s imagine you enter the workforce aged 22 and plan to keep working until you’re 67. Let’s also imagine that your salary is (and always will be) $50,000.
Finally, let’s get technical and imagine that you have an investment return of 4.8 per cent, a tax on earning of 6.5 per cent and investment fees of 0.5 per cent (all per annum).
Here’s how much superannuation ASIC says you will finish with under three different fee scenarios:
| Fee level | Contribution fee | Admin fee (p.a.) | Indirect cost ratio (p.a.) | Final total |
| Low | 0% | $50 | 0% | $263,907 |
| Medium | 0% | $50 | 0.6% | $234,415 |
| High | 0% | $0 | 2% | $174,632 |
There’s a massive difference of $89,275 between the low-fee and high-fee options.
You also get interesting results if you keep the medium fee level but play around with three different investment returns:
Investment return | Contribution fee | Admin fee (p.a.) | Indirect cost ratio (p.a.) | Final total |
4.8% | 0% | $50 | 0.6% | $234,415 |
5.4% | 0% | $50 | 0.6% | $265,271 |
6.0% | 0% | $50 | 0.6% | $301,395 |
As the tables show, a fund with a medium fee structure and an investment return of 5.4 per cent ($265,271) outperforms a fund with a low fee structure and a return of 4.8 per cent ($263,907).
Fees and investment strategy go hand in hand
So what should Australians look for when comparing the fee structures of different funds?
QSuper head of investment strategy Damian Lillicrap says super funds that have a combination of performance fees and highly competitive base fees provide good value for members.
“Performance fees mean that investment managers get paid when members benefit,” he says.
Mr Lillicrap also believes that a fund’s fee structure and investment strategy are equally important.
“Most conversations seem to isolate each element rather than recognise that it is only in combination – and done well – that the odds of meeting members’ objectives are maximised,” he says.
“Costs are involved in sourcing the mix of assets that can produce diverse return streams – especially hands-on, unlisted assets like infrastructure, real estate and private equity.
“Managing risks in portfolios so that returns are reasonably consistent without extreme performance swings also involves costs.
“Fees are the wrap-up from sourcing returns and risk management.”
Mr Lillicrap says QSuper doesn’t pay managers to try to beat the stock market. Instead, QSuper pays fees to get access to some great private assets such as direct infrastructure, property and private equity.
“Over the last decade, these assets have produced great returns and have diversified our portfolio,” he says.
“Some funds, which promote themselves as having low-cost products, typically don’t buy these private assets, which means their members miss out on the great returns they can produce.”
Best-performing publicly available balanced funds over 10 years*
Fund & product | Option | Return over 10 years (% per annum) |
Balanced | 9.7% | |
UniSuper Accumulation (1) | Balanced | 9.6% |
CareSuper | Balanced | 9.5% |
Equip MyFuture | Balanced Growth | 9.4% |
VicSuper FutureSaver | Growth (MySuper) | 9.4% |
Russell Investments iQ Super Employer | Balanced | 9.4% |
Rest | Core Strategy | 9.4% |
Plum | Pre-mixed moderate | 9.3% |
AustralianSuper | Balanced | 9.3% |
Sunsuper For Life | Balanced | 9.3% |
* The table shows results from the SuperRatings SR50 Balanced Index (60-76) for the 10 years to February 2019. It includes only funds open to the public. The SuperRatings SR50 Balanced Index (60-76) calculates returns after investment fees, tax and implicit asset-based admin fees. Past performance is not a reliable indicator of future performance.
The views of the author are not necessarily the views of the QSuper Board. This information is general information only, and you should get professional advice before relying on this information. Past performance is not a reliable indicator of future performance. Each of QSuper’s investment options has a different objective, risk profile, and asset allocation. Visit qsuper.qld.gov.au for more information