Ever had that moment at the mechanic when your car's malfunction is described to you in baffling detail to justify the bill you're about to receive?
Did you just nod along, take deep breath, and pay it?
Well, a similar dynamic has long operated in the superannuation sector.
For the minority of people who even get around to opening their superannuation statement, a bewildering array of fees may await: investment fees, admin fees, advice fees, switching fees, indirect costs, the list goes on.
But super is a complicated business. How can the average person possibly work out whether the fees they are charged are reasonable or not?
The problem is a lot of super funds, mainly those owned by the big banks, understand this situation all too well. And some of them have been taking advantage.
Not all funds are transparent with how members’ fees are spent. There's not always disclosure of the expenses towards which each fee is spent on, or how much is retained in profit.
For example, this year, as the Royal Commission raged, AMP cut the administration fees of its SignatureSuper MySuper products from 0.64% to 0.29%. The cost of administering the fund appears to have halved during that short period.
Pay more, get less
While deciphering whether any given set of fees is reasonable or not can be tricky, what we can say with certainty is that excessive fees are not justified.
One very easy way to measure this is to look at the fees charged versus returns.
In most markets you'd expect higher priced goods to be of superior quality. But in super, higher fees generally mean inferior performance.
In fact, look at the graph below and you'll see how high fee investments generally generate lower net returns.
And here's the kicker: thanks to the economic phenomenon known as 'premium pricing,' charging higher fees can actually convince more customers to stay with you, because they are convinced they must be getting something for their money.
So what's a reasonable fee?
Unfortunately, it's impossible to identify a reasonable ‘administration fee’ or a reasonable ‘investment fee’ in isolation, because different funds weigh their fees differently.
A fund with a low administration fee, for example, may only offer expensive investment options.
Furthermore, different fee structures will have different effects depending on a member's individual circumstances. If you have a low account balance, it's better to be with a fund that predominantly charges fees as a percentage of your total investment. If you have a high account balance, you'd want to be a member of a fund that charges a lower percentage fee, even if the flat fee is higher.
So the only indication of a fee’s reasonableness is the combined fees on a member’s account.
Estimating and comparing fees is now simple for MySuper investment products, because it is mandatory that all these products state their fees in the Product Disclosure Statement.
Estimating fees for ‘choice’ investment products is harder and generally requires reading through several lengthy documents and combining the information from each.
So what's a dodgy fee?
The Banking Royal Commission has heard a lot of evidence on how big bank-owned super funds were charging advice fees for advice their customers never received.
But that's far from the only rort.
The Get Your Super Back campaign is focused, in part, on the uncompetitive fees charged by retail and bank-owned super funds.
For example, the Royal Commission heard evidence that AMP Super Ltd delegates its functions to other companies in the AMP Group, with the administration and operation of the trust handed over to AMP Life Ltd. As part of this arrangement, AMP Life provides no explanation or identification of what fees it charges in its management of the AMP Super super funds. AMP Life Ltd determines the fees to be charged to be members as disclosed in the PDSs. Whatever the fees disclosed to members, that is the revenue it receives. Instead of going to market and trying to find members a manager who would charge the lowest fees possible, AMP Super passed on management to their subsidiary, who had a commercial interest in charging members as much as possible.
The Get Your Super Back Campaign will allege that these super funds were charging fees much higher than they could have been charging.
Take a bird's eye view
The only way to really assess whether your fees are excessive is to compare where you sit in the market. For a MySuper product, the Product Disclosure Statement will provide a breakdown of fees, as well as a statement of the costs expected on a balance of $50,000. As such, for MySuper products, it’s possible to compare the total annual fees on a balance of $50,000. By comparing your fund against others in the market, you can get a sense of whether or not you’re paying too much in fees.
Knowing your fees - a one minute glossary
Fees charged for the management of fund assets. Generally correspond to how actively the investment product is managed. Investment fees are charged as a percentage of assets invested in each particular investment option.
Includes performance based fees and other indirect costs such as transaction costs, legal fees, and regulatory compliance costs. Varies whether they are set out separately or as part of the investment fees.
Charged for the day-to-day operation of the fund. Generally charged as a percentage of total assets invested plus a flat membership fee (charged per account rather than per investment option).
Some funds may charge a flat ‘exit fee’ for any partial or full withdrawals.
Some funds charge a flat or percentage based fee for switching between super options within the fund.
May be charged for advice services in relation to superannuation account. Can either be one-off or ongoing depending on the particular arrangement. Are generally agreed between client and adviser.