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Superannuation and the true cost of fees

The Australian superannuation industry has been in the news again this week with researchers Dr David Ingles and Josh Fear from The Australia Institute revealing some very interesting numbers on the industry. Their findings and research make interesting reading. I have extracted some information from their findings which add to my persistent calls for people to take charge of their own financial destiny.

Ingles and Fears opening comments from their research report summarises well the conflict that occurs within the superannuation industry in this country.

“The existing superannuation system is built on a contradictory notion of the way people make financial decisions. On the one hand, the concept of compulsory superannuation suggests that Australians are myopic, irrational and have to be forced to save. On the other hand, when forced into the system, fund members are assumed to be informed and discerning investors, able to make rational decisions about how to allocate their retirement savings among a host of competing alternatives. Only one of these opposing views can be correct and it is the responsibility of policymakers to design systems that accommodate real-world human behaviour.”

The report also highlights the cost to the nation’s wealth of the running and management of these superannuation funds, with the researchers finding that:-

“Widespread lack of engagement with superannuation means that competition in this sector is structured around intermediaries (like financial advisers) rather than consumers. The aggregate administrative cost of the Australian superannuation system is 1.35 per cent of assets according to Rainmaker Information;1 Rice Warner Actuaries give a similar figure of 1.26 per cent,2 neither of which sounds substantial. However, given the $1.1 trillion size of superannuation assets, this amount in fact represents a transfer of $14.3 billion per annum from fund members to the financial services industry, equating to half the $28 billion cost of providing the age pension—a payment that accrues to over two million retirees.”

Administrative costs of 1.35 per cent have been estimated to reduce final super fund balances by up to 27 per cent or over $130,000 for a worker on the average wage. To rephrase, this cost constitutes around one-quarter of a typical worker’s total superannuation accumulation, a much larger figure than if expressed with reference to total assets.3 Whether this represents true value for money remains an open question.

High fees also impose costs on the public purse. People are expected to maintain themselves, wholly or partly, in old age and the government has provided very generous public subsidies by way of superannuation tax expenditures in order to attain this end. But substantial degrees of self-support are not likely to be achieved if, as at present, high fees reduce retirement lump sums by very significant percentages. The effect of the current system is to raise the proportion of retirees who are wholly or partly dependent on the age pension, which will inevitably result in higher government expenditure and a commensurate burden on taxpayers.

As educated investors we have the skills and ability to manage our own financial destiny. Not only is it possible to outperform the majority of the fund managers, but we are also able to save ourselves substantial amounts of money in fees and charges which is money better off in our pocket than that of a fund manager and financial adviser.

As reported in yesterdays Sydney Morning Herald written by Annette Sampson, more Australian’s than ever are moving away from traditional Managed Funds and Investment Managers in the hope of doing it better themselves.

Some 410,000 Self Managed Funds have been established by more than 770,000 people. According to the Australian Prudential Regulation Authority, self-managed funds held $332 billion in the kitty, or just under 31 per cent of the 1.1 trillion invested in super until June 2009.

Reasons vary about why so many investors choose to manage their nest egg, but control is chief among them. Self-managed fund investors typically want greater flexibility and the opportunity to take a more active role in their savings strategy.

It must be said that establishing a SMSF is not for everyone. It is also a highly debated topic about the minimum capital requirement which should be considered before setting up a SMSF. Some say as little as $50,000 but I would suggest closer to $100,000. You must consider the auditing and account keeping fees which are mandatary for all SMSF’s.

The decision to mange your SMSF is the first of many decisions you will have to make upon taking control of your financial investments. As always, I encourage those taking this path to undertake the required education and training so your journey is a success.

1. Rainmaker Information, 2009 Rainmaker Fee Review, March Quarter 2009 Edition.
2. M Rice, Superannuation Fees Report—Market Segment Analysis at 30 June 2006, prepared for the
Investment and Financial Services Association by Rice Warner Actuaries, May 2007.
3. Sydney Morning Herald – Annette Sampson – September 2009


  • Marc says:

    That’s an easy one. The funds are mandated to stay invested most of the time, so the best they can do is chop and change between all the sinking ships in the hope they don’t sink as much as the other guy. They don’t have the option of just “going to cash”. Am I right on that Gary?

  • Peter McMaster says:

    For anyone interested, on my SMSF the costs amount to less than 0.5%

  • Gary Stone says:

    Response to Comment by Marc:

    “They don’t have the option of just “going to cash.”

    This is correct for the majority of managed funds especialy the large ones as they will have too much of an effect on the market if they cash up too much of their capital.

    However some of the smaller boutique funds do have this option and are nimble enough to cash up.

    Also, smaller hedge funds can cash up and use alternative strategies but if they get too big then they face the same problems.


  • Tom McKernan says:

    Thanks for the artical on superannuation. As I see self managed and instro managed super, it’s the same as driving the car yourself, or paying a taxi driver to do it.

    Did you get a licence and car because it was cheaper than paying a taxi driver to take you to work/ the shops/ visiting/ to the beach and whatever?

    So why pay a ‘manager’ to drive your superannuation? Ask yourself why you are not learning how to become a ‘man-of-age’. E.G. MAN-AGE = MANAGE.

    Regarding your drivers licence, did you find it in a weeties packet? No, you studied and practiced driving under somebody that had a vested interest in you. Regarding your car, did somebody give you a car? No, but rather you worked for it?

    Was it hard to get? Yes. Were the benefits worth the risk and pain? Probably yes.

    So to is the procedure for producing money from shares. From my perspective, both activities look hard, feel dangerous and hurt when I crash. However, I’m the driver in both vehicals.

  • John Keays says:

    I keep reading these comments on fees for the super funds and find it is quite clever how the fees are hidden.

    The normal entry fee for a managed fund is 2% and the fee when it comes out is around the same. That is all in the PDS of a big fund. You can check each fund for its entry and exit fees.

    The management fees for stamp duty and bank charges is maybe 0.1% and that is on going. That seems to appear on the statement from the fund and it doesn’t look that bad. There is a MER type fee that the primary fund charges and that is usually around 1.0 to 1.5 per cent on the total fund. I think that is used to cover the legislative requirements of the Superannuation system. Submission of the tax returns and meeting governmental regulation.

    I tried to look at the fee structure inside the the fund and that is not disclosed. I asked for the list of shares used for my fund as a simple portfolio. I wanted to compare the returns I get from a portfolio and my share selection with the fund that I had put away for 20 years as a regular payment.

    I know that I would need to pay stockbroker fees and accounting fees.

    The money is then paid over to the actual fund manager who is a wholesale fund manager. He has to make a living on the funds so he must charge a fee to the retail fund manager and that is taken out prior to the valuation of the shares so managed. I can’t find where that internal fee appears. All I get is an effective rate of return after trading with the wholesale fund manager.

    I did a comparison between the ASX All ordinary index and the quoted value of the units in my Australian Superannuation account. The figures are published by the company and can be downloaded from the web. I ran a simple graph over the last five years by normalising the asx index and the fund value over the whole five years. I found that the difference between the index and the super unit rate did not varied by more than five per cent. The retail super manager followed the ASX All ordinaries. That is what the fund has published as its objective.

    For a super fund there is a 15% tax on the dividends and that needs to come from somewhere. The ASX all ordinary index doesn’t include the dividend amounts. On average shares pay 4% paid as dividend and 3% imputation credits. Now I think 1.5% percent goes to the tax department and that leaves about 5% income that must pay the wholesale manager for managing the funds. Say 2% in performance fees and 2% in costs. I wanted to see these figures published by the retail fund manager. They don’t seem to be available. I would normally get them as a shareholder in the super fund but not as a client of the super fund.

    For the transition to retirement fees the PDS of the fund stated that if a financial advisor was not involved the fee was 2% of the total fund value. I renegotiated this fee.

    There are other fees for service such as changing funds fees that will vary from fund to fund.

    These fee details don’t seem to hit the popular media outlets as a review of the fees. The media seems to get excited about 1.5% to 2.0% fees but the overall fees are much higher.

    To do justice to the fees you would need to look at the fees over the lifetime of the client/super fund relationship and then get an average fee that has been paid as a percentage of the money held in the super fund.


  • Beat Odermatt says:

    I fail to understand why superannuation funds manged to make massive losses during the last couple of years. I did believe that these people were professionals and highly trained to prevent losses of investors. Shortly before the financial downturn started, I visited my financial advisor and requested the cashing of our managed superannuation fund. My wife and I started a SMSF. We held most of the money in high interest online accounts and slowly started to invest in shares. By trading shares we managed to survive the economic downturn with a small profit. Would I have kept the money withing a “professional” managed fund. we would have lost close to 30% of retirement savings. I certainly cannot see a reason why I should pay somebody a fee to make losses whilst I can make a profit as a novice.

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