Superannuation Fees & Charges
Superannuation Fees & Charges
Most people in Australia these days have majority of their savings within the superannuation, whether in an accumulation stage or in a pension stage. And the size of the superannuation investing will only be growing over time.
Here is the list of the 20 biggest super funds in Australia: Is your super fund listed here?
As you can see some super funds are public, some are industry funds, others are so-called retail funds. If you don’t really know the difference between them or what they can provide as a point of difference, read the article: Best Super Funds – Really? How to choose a super fund.
So now, let’s check who made the most money out of the total fees paid by members in 2020
Is you super fund listed in the second table?
So why am I showing you those numbers?
I really want you to remember that superannuation is a big business, with the amount of money and profits that are beyond comprehension of a normal person.
Total assets invested in the superannuation system is already over 3 trillion dollars, and growing, so no wonder every super fund and investment house wants a piece of their pie. What I would like for you to take out of this video is to make sure that you can get your pie and eat it too and not to be a casualty of this superannuation business of fees grabbing.
Fees are inevitable, but pay those that bring you the benefit, that assist you with smart planning and smart investing, that improve your investment returns, minimise volatility if this worries you, and try to reduce fees that are of no befit to you.
And please, do not get emotionally attached to your super fund, it is a business for your fund and this is how you should treat it as well.
What type of fee you may pay in a typical superannuation fund offering?
- Administration Fees
This is a bit of necessary evil, as it is super fund’s responsibility to collect all contributions, keep records of all transactions, preparing an annual statement for you, most super funds will have a website for you to log into and check your balance, investments and performance 24/7 (hopefully) – so this is an essential service.
- Management Expanse Ratio (MER)
This is a fancy name for Investment Management Fees. This fee is paid directly to your investment managers and it is calculated as a percentage of the balance you have invested with them. Therefore, if you have a portfolio of 10 separate fund managers, you will know exactly how much each one is charging you for their work to provide you with returns. If however you have a pre-mixed fund, such as “balanced”, “growth”, “conservative” you really have no idea who is you actual fund manager, who invests your money, who gets paid what, which fund manager from the mix is a good performed and who is rubbish and you really have no say in the matter. And I as a financial planner dislike that option, as it keeps me and investors in the dark.
What is even more confusing, this is often a fee not disclosed on your statements, as those management fees are not deducted from your superannuation account directly, but rather deducted from the investment returns, before that return hits your superannuation account.
Obviously, we all are trying to reduce ongoing fees, but if a fund manger is providing you with a good return, especially a consistent return over the longer term, don’t cut it out, just because it might be charging you more money. If you receive a higher return, then such a fee is quite justified, wouldn’t you agree?
- Indirect Cost Ratio
This fee is very similar to the previously explained Management Fee, but it can actually include more fees in its calculation, therefore it often is much higher that MER.
- Performance Fees
Some super funds or fund managers charge additional fee once they hit certain level of returns. This is charged as a % which is capped with an upper % limit.
- Investment Switching fees
Some super funds will charge a fee for switching between different investment options. For example, you could be charged such a fee if you want to switch from a balanced portfolio to a growth portfolio and vice versa.
- Buy/Sell spreads
Similarly, to Investment Switching fee, this fee could be charged at the time when you are changing your investments. It is charged on the basis of the difference between a buy and sell price of units in funds of your transaction. The difference in price of buy and sell price of those units is called buy/sell spread. Very similar to the way you purchase international currencies, before you go on your overseas trip. If you wish to buy US dollars, there is a buy price, when you return from your trip and you have US money left over, you cannot use them here in Australia, therefore you can sell them back at the exchange office, the price to sell the same US dollar will be different (and usually lower than the buy price).
- Custodian Fees
Not all super funds have custodian fees, but if you see such a fee in your super fund PDS, it is a fee payable to and external company with a board of directors that oversees the activity and assets of the underlying super fund. Therefore, this board of directors sort of work on behalf of members to ensure your super fund works for your benefit as a member.
- Transaction Fees
Not all super funds have transaction fees, but what most will do is to allow you to have 2-3 switches a year with no transaction fees applied. If you go over that number of switched, additional fee of $15 to $30 per switch may be charged. Per switch means per each fund changed. Therefore, if you have 10 managed funds and you request asset rebalance of all 10 funds, that is 10 switches. So, if your super fund is charging such a fee, be aware of number of transactions you request to have performed within your fund within a year.
- Insurance fees
Checking how much you pay for your insurance, what is the cover you get for your money and if you actually still need that insurance cover in the first place. Fees charged for your insurance can virtually eat up your super returns and your contributions, so you need to understand the risk/reward outcome. The older you are, the lower is your need for insurance cover, but the higher the insurance fees become. It is because due to age and your possible health issues, you become a greater risk for the insurance company. So again, you need to make your assessment rationally and with full knowledge and understanding of what you are paying for and whether you really need it.
- Adviser Fees
Some super funds offer what you call a general advice. It is against the law to give personal advice without the proper license. But unfortunately, many members rely on that general advice and can make lots of mistakes and pay for it dearly in the long run.
Obviously, you might say I am biased being a financial planner myself, but I honestly in every bone of my body believe that out of all the fees you pay through your super fund, this is just about the only one that is to your immediate benefit. The other one is to pay for a fantastic fund manager that can provide you with great returns.
Financial Planner is the only person in that equation that knows you intimately, the only person that sets up a financial advice plan and strategy just for you, not for your neighbour, not for other members of your super fund, not for ATO or the government or the Centrelink office – but for YOU.
If you watched some of my videos, or read my articles, you would know by now, that I have a big issue with the whole discussion about “let’s reduce fees and our super will grow faster” It is not necessarily the case, by this logic, you could leave all your super in cash and pay close to no fees. How much would your super grow then? Not by much at all. So please be reasonable and very rational about fees with good judgement which fees are worth paying and which are waste of your money.
Many super funds say that fees are included in the unit price, therefore it is not additional fee for you. I am sorry, but in my language, this is just a way to hide the fee, so it does not scare investors. The fee is the fee, no matter how it is charged, and it should be fully disclosed. Transparency and honesty should be the norm in superannuation investing, but unfortunately it is not.
I am not opposed fees, as I said before they are inevitable if we wish to receive half decent returns, but it is my right as a member of the super fund, to know them all and it is a super fund’s responsibility to be open and honest about fees and not hide behind unit pricing or listing fees hidden deep down in the PDS that the public and members never read. And even if you try, those documents are written in such inviting tone and language, that if you suffer insomnia, those documents would cure you in no time.
OK, this is the list of the fees you could see charged by your superannuation fund. Hopefully you will not have them all, but I am sure quite a few will be listed in the PDS if you read it.
If you are unsure, just contact me for comparison of fees between what your fund charges you and other options.
And don’t forget to watch my next YouTube episode of AboutRetirementTV.
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