Why Choosing A Super Fund Based On Fees Alone Is A Mistake
We have all seen the ads on TV – Compare the pair – same income, same age, different superannuation balance and the reason is fees! It is a catchy marketing strategy, but when choosing a superannuation fund, whether it be an industry fund or retail fund, it is a mistake to base your decision solely on fees. ‘Low fees’ does not equate to a higher super balance at retirement as the industry fund ads would have you believe. It is too simplistic a view. To make the appropriate choice for your situation, you need to know what the fees are for, how the fund is taxed, what you want from your fund and what you’re prepared to pay for a tailored approach. It is not a matter of just looking at one figure (i.e. fees). It requires greater research.
What Are Super Fees And How Are They Charged?
All superannuation funds have fees. Superannuation costs can be broken down into two key areas – administration and investment.
Administration – are the fees incurred from running the fund and providing services to members and their employers. When comparing superannuation funds, you need to look at fees carefully. As you will see from the example below, how much you have in super can affect how much you pay in fees.
Fund X charges a flat fee of $2.20 per week. Fund Y charges a lower fee of $1.80, plus an asset based fee of 0.04%. Based on a $50,000 account balance the fees are basically the same. See the table below.
Super funds are required to show you their standard fee comparison based on an account balance of $50,000. But what happens when the account balance is only $20,000? Fund X is still going to charge $2.20 a week, but Fund Y will become cheaper. Conversely, if the account balance is $200,000, Fund X becomes more cost effective.
So which fund is the “low cost fund” all depends on the fees and how they are charged. You must delve deeper to see what the fees are and what cost or benefit they deliver depending on your financial situation.
How Multiple Super Accounts Affect Your Return
According to the ATO, at 30 June 2017, over 14.8 million Australians had a super fund account. Approximately 40% of these people have more than one super account 1
If we assume that the average administration fee is $2 a week, or about $104 a year, 40% of Australians are paying at least double ($208), if not triple that figure in administration fees. If all their superannuation was consolidated into one account they would be saving at least $104 (based on having only 2 accounts). Calculated on a $20,000 account, that is over 0.5% per annum. That amount over the course of a person’s working career could have a measurable impact on a member’s retirement balance. It is therefore beneficial to find your lost super and roll into one account.
Investment – these fees are harder to track as they come out of the investment return, they are not directly charge to the member or shown on their account like administration fees. The level of fees in this area can be controlled somewhat by the member through how their investments are allocated. Most funds have different investment options members can choose from, each with its own fee.
Taking the view that the lower the investment fees you pay, the better, is again too simplistic a view. The reason being that lower investment fees does not equate to more in your super. The quality of the investment decisions also impacts the end balance.
When selecting a superannuation fund, you can choose between index and active fund managers. Like most things, you get what you pay for. Index funds take a no-frills, passive approach to investing, by simply following what the market is doing. For example, if Stock A is 3% of the market then indexed funds hold 3% of that stock. They do not assess if the stock is under or overvalued.
If you pay extra for an active fund you get a manager whose job it is to assess whether a stock is over or under valued and sell or buy accordingly. Active fund managers try to outperform the index by picking sectors and securities they believe will outperform in the future. This is a more proactive place for your money. These funds conduct more sophisticated research on the market with the intent to deliver a better return on your money than an index fund which simply follows the market. So, whilst you may pay more for an active fund manager, with hoped better than market returns, you still may have more in your superannuation account at retirement.
Therefore higher fees may in fact be getting you a higher return on your investment which is the main goal.
What Is The Superannuation Fund’s Tax Structure?
How your super fund is taxed is another important feature to consider when choosing where to put your money. Industry funds use a pooled tax structure; which means all the fund’s members are pooled together and they pay a proportion of the total tax. Retail super funds use an individual tax structure meaning each individual account of the super fund does its own tax return. This difference could have a significant impact on the amount of tax paid by your superannuation account and therefore its long-term balance. If, for example, you are a high growth investor with large exposure to Australian shares, you would get more franking credits than a conservative cash based investor. If you were in an Industry fund, the high growth investor would be penalised and the conservative investor would be given a boost from the funds being pooled. The tax benefit franking credits provide would be watered down if you are a high growth investor and put your superannuation in an industry fund.
What Do You Want From Your Super Fund?
Low fee funds or industry funds are generally lower cost because they are no-frills. They don’t have the extra features of retail funds such as education and interactive tools to help you understand your retirement goals and how you are tracking to achieve them. These are beneficial services. They can help map your superannuation so that you can better understand your money, retirement goals and how you are tracking from wherever you are in the work-retirement lifecycle. Depending on your position in life, time to retirement and risk profile the appropriate product for you will change. The level of interaction you want with your fund will also differ. Some people like a set and forget approach while others want a high level of engagement with their fund. Unfortunately, many Australians do not take superannuation seriously until retirement is imminent. These tools can help to make your super more engaging and should not be discounted by taking a ‘low fee’ strategy for selecting a superannuation fund. A tool which keeps you engaged with your superannuation could mean more money in the bank at retirement.
What Is The Value Of Advice?
When comparing superannuation funds there is one element that cannot be quantified. What is the value of having someone to call for advice? What is the value you put on having someone looking out for your best interests? There are many benefits to having a financial adviser look after your portfolio. It provides you with tailored advice. You have an adviser proactively looking after your financial position. It can provide you with peace of mind, something that is unmeasurable yet highly valuable.
In summary, when choosing a superannuation fund, basing your decision on low fees alone is a mistake. Depending on how the fees are structured and how much you have in your superannuation account, a ‘low fee’ may in fact not be that low. The tax structure, quality of the investments and the level of care you receive are arguably more important than how much you pay in fees. At the end of the day, having the most money you can in your superannuation account at retirement is the main goal. Seeing a financial planner can help you make sense of the superannuation jungle. Tailored advice is advantageous when making decisions for your retirement and future financial security.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.
Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429. The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.