Superannuation is an interesting industry where marketing has managed to completely override common sense. Industry funds have been marketing on the basis of low fees for so long that many people think their super fund is doing a good job if it can charge low fees. The truth is that fees are only one, relatively small piece of the puzzle.
Getting technical for a minute, superannuation funds generally do three things – administration and trustee duties, investments and insurance. For each of these there is a cost involved and this gets passed to each member. How the fund operates, what it lets you invest in, how customisable it is and the level of service they give you will determine the administration and trustee costs. The cost of investment is determined by what you’ve chosen to invest in and insurance premiums are dependent on the level and types of cover.
There is currently at least one fund out there that charges you no fees. That’s right, none at all. But as I’ve just discussed, there are fees and costs involved in running a super fund, so how is the fund meeting it’s costs? Or have they become a charity, offering free super for all at their own expense?
This is where the smoke and mirrors come from. The product is backed by a large bank and only offers the ‘Balanced’ fund for free. It then loads up the 50% defensive assets entirely in cash and the other 50% in shares and growth assets as per usual. This 50% cash allows the bank to pay a very low return to your super fund, while most likely lending this money for a much higher return to a borrower. The profit they make on that second transaction pays for your super fees.
Ok. But you’re still winning because you pay no fees, right? Wrong. By having such a watered down ‘Balanced’ fund, they are under-performing the majority of balanced funds in the market by about 1% over 3 years. Those other super funds will charge an investment fee, and an admin fee and you’ll still end up slightly better off, they’re just honest and open about how everything is working – and I’d far rather be paying fees and investing through a super fund I understand, than paying no fees through smoke and mirrors. After all, no super provider in the world is going to operate at a loss, all those fees will have to be paid customers somewhere along the line.
Moving fees around and playing with the smoke and mirrors might save you a little bit here and there, and going from a high-cost super fund to a low-cost fund might save you 0.5% or 1%. Far more important is to be invested properly. The difference in long-term returns between a stable fund and a high growth fund is over 4%pa. Starting with $100,000 over 10 years the difference could be $65,000.
Most funds come with a default level of insurance cover and a corresponding default premium. If you don’t need the cover, you could be pay hundreds of dollars each year for cover you don’t want or need. On the other hand, this may be the best way for you to hold insurance cover. Paying it from super eases any cash flow burden and could be exactly what you need. Just because they charge a premium to your super fund, doesn’t mean you should get rid of it.
So how should you approach super?
Deal with what’s in your control. You can’t control the markets. You can’t control the super fund.You can change super fund to one that suits your situation better. You can change your investments within the super fund you have. You can alter your insurance. You can control how much you’re saving in to your account. You can control how much you’re investing outside of super. You can control what other investments you have.
Your retirement is your responsibility and we’re here to help. We think that money should help you create good times with great people and by giving financial advice we aim to give people the freedom to create their world.