Fees ate my super…or did they?

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Are Australians paying too much in management fees on their superannuation?

Nathan Bonarius

Nathan Bonarius

Recent discussion in the media suggests just that. However, some of the publicity is based on inaccurate claims or assertions that a single national fund would be much cheaper than a competitive environment. Let’s look at the facts…

The arrival of no frills MySuper accounts has placed downward pressure on management fees, creating further impetus for funds to properly review their overall value proposition for members.

The sector is already subject to an overall decrease in fees. Rice Warner research released in May shows as at 30 June 2013, management fees accounted for 1.12% of assets ($16.9 billion annually), down from 1.20% in 2012.

So, is 1.12% too high? It is certainly much lower than a decade ago when the average was 1.37%. Further, we expect the level to trend down to 1.00% of assets within two years as legacy products are gradually brought into the modern pricing structure.

While the trend in the fee level is positive, the evaluation of the simplistic percentage is more difficult. For example, there is a large variation in the level of fees paid by different fund members. The variables that determine superannuation fee levels may include any one of the following:

  • the type of fund (retail, industry, public sector, corporate or SMSF)
  • the size (and bargaining power) of the employer
  • account balance
  • investment risk – for example whether you pay more for fund managers to outperform market return
  • the level of services provided to you
  • whether you are in a defined benefit fund and
  • whether you manage your super yourself in an SMSF.

These differences can mean that some members may be paying less than 0.5% p.a. while others may pay well in excess of 2.00% pa. There are also fee subsidies for some members where employers meet some of the costs.

In some cases, higher fees can be justified by the level of service received or higher expected investment returns that the fund may deliver. In other cases, supporting a niche product offering may also justify a higher level of fees.

Although many members are getting a good deal, it is arguable that overall fees are too high and have not fallen as far as they could have given that assets have nearly tripled in the past 10 years. However, super funds today provide a much broader range of choice and services than they did a decade ago.

So what can funds do to provide members with the best value and compete in a world where a commoditised MySuper product is shifting members’ focus onto fees?

Funds would ideally gain a deep understanding of the exact drivers of expenses, and a strategic sense of where other providers are heading in order to not be left behind.

Sub-scale funds would also identify a strategy to achieve their optimum size or identify a niche that allows them to survive in a MySuper world.

If members are able to spend more time demanding better value for money and funds spend more time acting in members’ best interests, the result would also create higher retirement incomes for all Australians.

Nathan Bonarius, Head of Superannuation Market Insights, Rice Warner

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