Investing Basics: Are you paying too much for your super?

As superannuation members, we want to steer clear of high fees and lousy performance. We rely on our super to provide in retirement – without this pot we potentially face poverty as pensioners. 

So, what can you do to avoid this fate? While the system undergoes some serious self-reflection, there are some quick and easy checks members can do to ensure they're getting the best value from both their super fund and investment choice.  

What are you paying for? 

Your super is complicated, especially when it comes to fees. Not only will every super fund charge different fees, but within that fund, each investment option has different administration and management fees attached to it.  

For example, a low-risk low-return cash investment option, or an option invested entirely in low fee ETFs should carry lower fees than an actively-managed fund, which may carry higher risk, but potentially be a high returning investment option. 

Let's break the fees down. Superannuation funds typically charge several fees for managing your superannuation: 

• Administration – a fee charged to cover the costs of administering the fund 
• Investment – a fee charged to cover the costs of managing members investments 
• Indirect costs ratio - indirect costs of managing the fund including management and performance fees, investment-related legal, accounting, auditing charges and other operational and compliance costs 
• Performance – fees paid by super funds to third parties such as investment managers for generating positive returns. These fees are often calculated as a percentage of the returns generated
• Switching fees – a fee funds charge members for switching between investment options  
• Buy-sell spreads – a fee funds charge to recover the costs incurred in relation to the purchase or sale of an asset
• Exit fees – fee funds charge when a member decides to make a full or partial withdrawal of their super 

To complicate matters further, these fees cannot be viewed separately. On fund may charge low investments fees but a high indirect costs ratio, another may have high administration costs but very low performance fees – but the total cost charged could be the same.

The average fee charged across MySuper products, as covered by Morningstar analysis, based on an account balance of $50,000 is $606 a year or 1.2 per cent.

The damaging impact of fees

The difference between 1.5 per cent total fees and 1.8 per cent might not sound like a lot but consider how it will affect your total superannuation balance in the long term. 

Take a 25-year-old with an annual income of $50,000 before tax and super, and an account balance of $0, who aims to contribute 9.5 per cent to super. If they paid admin fees of $50 a year, an indirect cost ratio of 0.6 per cent and investment fees of 0.5 per cent, by age 65 they would have been stung $52,265 in fees.  

However, if they paid admin fees of $50 a year, indirect cost ratio of 0.3 per cent and investment fees of 0.5 per cent, by age 65 they would have paid considerably less in fees – just $40,927.  

How to reduce the cost of super

If you're worried about the fees your fund may be charging you, pick up the phone. Call your fund, ask them about all the fees they charge, and how their fees compare with other funds with similar investment options.  

Investigate whether your funds are in MySuper product. MySuper is an Australian government initiative which according to The Australian Securities and Investments Commission (ASIC) offers lower fees, and restrictions on the type of fees you can be charged. 

Moved jobs throughout your career? Check with the Australian Taxation Office (ATO) whether you have more than one superannuation account. If so, you'll be paying fees on two separate accounts. With double the fees.  

If you've had more than one job in your life it's more than plausible that you have more than one account, even if you don’t know it. In a report issued in May the Productivity Commission estimated that a third of all super account can be classified as multiple accounts, and that fees and premiums from these accounts erode member balanced by $2.6 billion a year. If you have more than one fund, consider consolidating. Just ensure you do your research as to which offers the best returns, and the lowest fees before doing so.

Are you paying for life insurance? 

Almost all superannuation funds enrol you into a basic life insurance product – including death and TPD (total-permanent-disability) insurance when you join. This is not an opt-in, tick a box if you want insurance procedure. You will automatically receive life insurance and fees will be deducted from your account balance. 

If you do not want life insurance cover for whatever reason, contact your super fund and request an optout form.  If you decide that you would like to continue receiving life insurance through your super fund, you should check your policy. See what you and your family are covered for – and what you’re not – the amount your fund will pay out on death or injury, and how much you are paying in premiums.

You can elect to increase your cover via your fund. If you wish to also be covered for income protection, some funds offer this as default for industries and members, while in other you'll have to request coverage.  

As with double fees, if you have more than one superannuation account, you'll likely be paying fees for two insurance policies.

More in this series

• Investing Basics: Everything you need to know about reporting season

• Investing Basics: A beginner's guide to ETFs

• Investing Basics: How do your savings compare to those of your peers?

Emma Rapaport is a reporter for Morningstar Australia.

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