Another way to consider fees is as a percentage of assets. As a rule of thumb, paying more than 1 per cent of your balance in fees warrants further investigation. The PC, which spent three years examining competition and efficiency in the super system, highlighted a category of high-fee products. That is, products with fees exceeding 1.5 per cent of assets.
Most of these are in retail super funds, which are those owned by banks and other financial services companies such as AMP. An estimated four million accounts sit within the high-fee tail, accounting for 17 per cent of super money, or $275 billion.
Closed fund alert
Rappell recommends checking whether your product is closed to new investors. If so, you may be in a “legacy product”. “This could raise a red flag because it might be an old product that can be less competitive,” he says.
The PC is highly suspicious of legacy products, which have high administration and investment costs. There are two million member accounts worth $127 billion in these products, On average, legacy products at the higher end of costs charge fees of around 2.2 per cent of assets.
While higher fees may be warranted in cases where funds are achieving really good returns, the PC found “funds that charge higher fees typically do not deliver better returns over time to members”. In fact, funds with higher total fees on average deliver lower returns, the PC’s final report, published on January 10, says.
“Some retail funds deliver above-average net returns,” it says. “That said, most have below-average net returns, which is prima facie evidence of fees driving persistent underperformance in those funds.”
The banking royal commission heard evidence that some funds had avoided closing legacy products because it would mean an end to commissions flowing to related-party businesses, most notably financial advisers.
“High fees for financial advice are prevalent in parts of the system,” the PC says. “Ten retail funds account for over 90 per cent of reported fee advice revenue of $1.6 billion in 2017.” The average member in these 10 funds was charged $341 per account for advice in 2016-17.
What to watch out for? Fees charged when no advice is delivered – an issue explored extensively by the royal commission. But trailing commissions and exit fees are also pretty noxious.
Trailing commissions worth about $400 million are being deducted from roughly 636,000 accounts every year, the PC found. Trailing commissions are an ongoing payment, typically a percentage of the account value, from the fund to a financial adviser.
The Future of Financial Advice laws banned trailing commissions from 2013, but allowed those already in place to continue under transitional arrangements; they were grandfathered. There have been widespread calls for the government to legislate an end date. “The time for transition is over,” the PC says. “The commission supports a full ban on all commissions on super products.”
About 60 per cent of super is held in accounts that attract an exit fee. Non-profit funds change an average exit fee of $25 and retail funds $50 but can be as high as $180. Some funds even charge exit fees as a proportion of assets. While exit fees are supposed to have been limited to cost recovery since 2012, the PC says the rules haven’t been enforced. Legislation banning all exit fees is before federal parliament.
Returns can also be sapped by insurance premiums. The PC identified a particular problem with unintended multiple accounts, which means some workers are paying insurance premiums two or three or even more times. One in three accounts is an unintended multiple – duplication that directly costs members nearly $1.9 billion a year in excess insurance premiums. Consolidating accounts involves a visit to the Australian Tax Office’s website.
Self-managed super funds garnered special attention from the PC, which said SMSFs with more than $1 million in assets are broadly competitive with other types of funds. But costs for SMSFs with less than $500,000 tend to be high, eroding returns.
While all of this sounds bad, the PC did not find the super system to be completely broken.
“The system delivers good outcomes for many members, but not all,” it says. “In the long term, members need strong investment performance and a balance that has not been eroded by unnecessarily high fees or insurance premiums.”
Doing a little homework is the best way to safeguard your savings, Rappell says.
“If you haven’t looked at your super for over five years, you really need to go and check and make sure you understand what product you are in,” he says. “It’s boring but it’s probably the best 10 minutes you can spend.”