Recently, I was looking at some performance comparisons for various superannuation funds. Yes I know, paint drying has greater appeal! But it sure is a good idea for you to keep your eye on these tables as a part of your retirement planning. Not only to see how your fund performs compared to others but it also helps to guard against making contributions to a ‘dog’ of a fund for ten years be- fore you suddenly realise it.
Remember every fund can lapse in performance at certain times, but if your fund is consistently under-performing the others then they have a genuine problem and you don’t want to share in it. So keep your eyes peeled.
Anyway, back to our comparison tables; at first glance, most of the funds do pretty much the same, with most being within a couple of percent of each other. Now one or two percent seems rather minor and nothing to be very concerned about you might think, but think again. Superannuation is a very long-term investment and differences of as little as one percent per annum can alter final balances dramatically and I do mean dramatically.
I actually looked at some calculations and just a 1% increase in your rate of earnings can add over a $100k to your final balance during a 30 year period. Unbelievable but true. The magic of compound interest should never be underestimated! Do some research on this and you will be astounded at the results. Such small differences early on can actually mean big differences at retirement time.
Unfortunately trying to get a 1% increase in your investment return consistently is impossible. It may seem pretty easy but investment markets being what they are, ensure guarantees are impossible to give out.
But there is another way. What about reducing your fees! That’s right, reducing your fees is a guaranteed method to genuinely improve your returns. Yes, you read it correctly, reduce your fees.
In my humble opinion, one of the greatest hoaxes perpetrated on the public has been the costs of administering a retail superannuation fund. The sheer volume of money pouring into these facilities on a regular basis should have reduced the management and administration expenses hugely, but it seems none of our large institutions seemed to have either the skill or ability to have created any cost efficiency at all. An even cursory glance at the fees charged over the last 10 years will show absolutely no reductions of any significance at all.
But rather than blame institutions for in abilities to cut costs, a more likely explanation is probably that we (the public) don’t take enough interest in our super funds, and those crazy, wacky superannuation guys know it, and take advantage by charging whatever they can get away with. Remember these are the same institutions that have been hauled before government committees on many occasions and not because they were doing a great job!
Now I can assure you that ringing up your fund and asking them to cut the fee won’t get you any- where. Not because of your lack of persuasive ability but rather super funds just don’t have the provision to cut fees on an individual basis. The general course of action is to shop around and see if you can improve on the expense side of the equation, without reducing the investment returns.
Remember, choice of fund allows Australians to move their superannuation pretty much to whichever provider they like. Additionally, payroll advancements have also meant that transferring money to a nominated super fund is easier than ‘falling off a log’, so don’t ever listen to your pay person when they say, “sorry, we just can’t transfer to that fund”
Let’s learn about fees
All super funds have fees; some more than others, so I have listed below the most common types levied.
Administration Fee – this is a fixed dollar amount charged monthly
Management Expense Ratio (MER) – a percentage applied to your total balance. Can be anywhere between 0.4% and 2.4% – every fund charges an MER.
Contribution Fee – a set percentage of each contribution made, between 0 – 4% of your monthly contributions. This fee has been somewhat phased out in recent years but if you have been with a fund for over 10 years it’s a good idea to take a close look.
Switching Fee – a set figure charged when you switch investment options
Advisor Fee – normally a percentage calculated against the total balance of your fund and deducted monthly. This fee is for ongoing services from your adviser. New FOFA laws require the adviser to authorise this fee with the client every 2 years. By the way, this is the fee the banks were charging their financial planning clients but didn’t deliver (have a read about this here)
Performance fee – this fee is a fund manager fee that shares any above benchmark performances between the client and fund manager. Normally they take about 20% but there is no rule. You need
to look deep into the PDS to find the fee if applicable. You will also see terms like ‘high water mark’, ‘style agnostic’ and maybe even ‘best of breed” when searching for this fee. Yes I know, weird phraseology alright, as they say in the US “I think they have sipped the Kool-Aid again”
Withdrawal fee – a set dollar amount usually deducted when you transfer your balance or with- draw some money
Buy/Sell spread – because superannuation funds are shown as unit prices, fund managers deduct costs that accrue to them when they buy and sell securities as a result of you entering or exiting a fund. To illustrate, if you entered a fund on one day, and were then able to withdraw all your funds on the same day you would actually get less money back than what you started with. The missing amount represents the fund manager’s processing fees. The fee is always built into the unit price.
Insurance Premiums – most funds have an amount of death cover provided to members. This cover comes at a cost, which varies depending on your age. The insurance premiums will be clearly marked on your statement as such.
Other fees – there can be a multitude of other names assigned to fees, so have a thorough check of every debt on your current statement.
A note on taxation
Obviously, a tax is not a fee in the truest sense of the word, but superannuation is taxed primarily in two ways. 15% is deducted from contributions classed as concessional, which are mainly your 9.5% compulsory and any salary sacrifice contributions. The tax is deducted on entry so you will see this amount missing immediately, so don’t be alarmed when you see the words ‘contribution tax’ on your statement.
Time to go shopping
The best way to begin the comparison process is to establish exactly how much your being charged. And the best way to do this is to first prepare a list of possible fee categories. In fact just write down the list above on a piece of paper. You do this to make sure you cover everything. The next step is to contact your existing fund. Make sure you ring the main contact number on your statement. If you have an adviser do not ring them, we need to get information straight from the ‘horses’ mouth.
When you get on to them it is just a matter of asking this question; could you please tell me the fees that are applicable to my account? You should have no trouble getting the information you need. Just write down the figures on your list. Once you have the figures all you need do now is to search out other similar funds and compare. Make sure you compare exactly like for like so as different in- vestment options have different costs associated.
To make it a bit easier there is a fee comparison calculator on the ASIC site that will do all the number crunching for you. Here it is, have a look. www.moneysmart.gov.au
A word of caution, when, and if you decide to move your fund, be careful not to jeopardize any life insurance you may have. Why, there is provision for life insurers not to accept everyone and when you transfer your fund you actually close the existing one and open up a new one. Once the old fund is closed your insurance cover is gone. Possibly because of medical issue, you may have recently developed the new insurer may not accept you.
Therefore never cancel a thing until you are certain you have a duplicate all set up. The best way is to open the new fund and when you are certain you have insurance cover approved with them, close the old one and transfer the balance over.
So there you have it, fee reduction can certainly add substantial funds onto your retirement balance so take the time, and look around for a better deal.
Did you know..?
If you somehow found a way to extract all of the gold from the bubbling core of our lovely little planet, you would be able to cover all of the lands in a layer of gold up to your knees.
Salary Sacrifice – It sure can be – particularly with the wrong employer!
Our superannuation system certainly has its complexities. And you can point the finger of blame directly at the Government (both political persuasions) Because no matter how many times they promise a simple, straightforward system, their constant tinkering actually achieves the opposite. What is a very simple concept – saving money for retirement – has been mired down with all kinds of; taxes, contribution types, preservation rules, death benefits and the list goes on & on.
So it came as no surprise recently, to read that a loophole within the system was being exploited by some companies. In fact, the ATO estimated as many as 2 million Australians are being (legally) short-changed on their superannuation contributions.
Here’s how;
There are a number of ways to contribute to superannuation but for now, we are only interested in two; salary sacrifice and the 9.5% compulsory employer contribution (SGC)
As you know, salary sacrifice is your decision to contribute a portion of your gross salary into your super fund. By doing so, it saves you tax and bulks up your retirement savings. You would also know that the 9.5% contribution is from your employer and calculated on your gross salary. Now here’s where it get’s crazy.
The calculation for SGC is based on what is termed your ‘ordinary time earnings’. (OTE) and looks like this; 9.5% x OTE = SGC But a salary sacrifice arrangement has the effect of actually reducing your ‘ordinary time earnings’, and therefore reduces the amount of SGC your employer need pay – ‘you do the maths’
But wait, it gets worse.
Oddly, all ‘salary sacrifice’ contributions are classified as’ employer contributions’, even though they are coming off the top of your salary. Therefore they are actually counted as being part of your employer’s super guarantee payment to you! And should your salary-sacrificed contributions be more than the SGC required amount, guess what, your employer won’t have to pay anything into your super.
A lot of salary sacrifice agreements are formulated to not disadvantage staff, but it is a good idea to check the numbers anyway. If you suspect an issue get onto your employer for an explanation.
It is very important to have a close look at your account every six months so when the statement comes out make sure you spend the time checking if you are getting all your entitled too. Have a look at this post for more information on doing this.
See you next time
