Q: What is the acceptable annual fee percentage that a superannuation fund charges? Is it best to go to the fund with the lowest fee? What do you recommend? Also, once you pass retirement age, can you change the company your super funds are with at this stage?
A: There’s been a lot of talk about the fees charged by super funds, and it’s true that in the past, some funds have behaved badly. Plenty of advisors and fund managers have become rich on the back of super fund fees. That’s all changing, and mostly, fees have fallen over the last few years. And let’s face it, if you want your retirement savings to grow (and be protected in the bad times), that comes at a cost.
So let’s look at some of the fees charged by super funds (you’ll need to add them all up to make comparisons easier).
First, there’s an administration fee. This pays for the fund’s office, staff, website and call centre support. Most funds charge a weekly fee, like $1.50, rather than a percentage fee, so for lower account balances, it can have an impact.
Depending on your investment option, you’ll also be up for an investment fee. This can range from close to 0 per cent for some cash or index fund options, up to 1.0 per cent for an international shares fund. If you’re in the standard balanced option, expect to pay somewhere around 0.6 per cent per annum.
Then, hidden in the fine print, there’s something called the Indirect Cost Ratio, or ICR. This represents the costs of owning some of the fund’s underlying investments.
Finally, you might find a range of other fees like performance fees, advisor service fees (which are basically commissions paid to an advisor), switching fees and activity fees. You might also be paying insurance premiums, regardless of whether you wanted insurance cover or not.
All those costs add up, and as the Australian Securities and Investments Commission’s Moneysmart website says, a difference of 1 per cent in fees could make a difference of 20 per cent in your final retirement payout. ASIC also says the lower the fees the better, but I don’t necessarily agree with that.
Sometimes, the cheapest is a bad choice – if you don’t believe me, drop into your local supermarket and buy some home-brand sausages. Yes, when you’re comparing super funds, fees are important. But there’s something even more important, and that’s the long-term performance after fees are deducted. That’s sometimes called the net return, and it’s the number you should be looking for.
You’ve probably read the line ‘past performance is no guarantee of future results’, but if you’ve ever children or pets, you’ll know it’s a pretty good indicator. How much should you pay in fees? Most of the larger super funds offering consistently good returns will cost you around 1.0 per cent each year for a balanced portfolio. If the total fees are way below that, I’d say some shortcuts are being taken. If you’re paying 2.0 per cent or more, then you’re probably indirectly paying for someone’s leased BMW and pony club membership.
As for your last question, yes, you can change super funds whenever it suits you, regardless of age. Just check carefully before you jump ship in case you lose any existing benefits.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.