Don't pay for the privilege of being misled

You can forget the investment returns. Although it's nice to know your account balance grew during the past financial year, sharemarket losses in the past couple of months have probably already wiped much of those gains out.

You can check that your employer has been contributing the full amount it should and that your insurance cover is adequate for your needs. You can also check the fees being deducted from your account but this is where the confusion can start.

The problem is, while most investors know fees can make a big difference to their retirement outcome, most have little idea about how much they should be paying and for what.

The super industry is largely to blame for this. Despite claims that fees are now more transparent, there is no consensus on how they should be charged or disclosed.

Recent research by an industry fund, AustralianSuper, found a mind-boggling array of fees being charged by funds. Contribution fees, asset fees, trustee fees, administration fees, expense recovery fees, trustee operation cost fees, adviser service fees, management fees, issuer fees, member fees - the list goes on.

Then there are one-off fees for particular services such as establishing an account, making withdrawals, or splitting super with your spouse, and the even trickier area of investment fees paid to the underlying fund managers who look after your savings.

The chief executive of AustralianSuper, Ian Silk, says the fund has been looking at fees in light of a recent decision to freeze its administration fee at $1.50 a week for the next three years. Although he says the freeze was due to efficiencies gained by the fund's size and scale, the timing is perfect.

Investment losses invariably lead fund members to pay closer attention to fees and to ask why all this money is still coming out of their savings. But the industry makes it hard to understand whether you're getting value for money.

For example, Silk says, while some of the fee variations are due to proprietary naming, they can also be used to cloud the total cost.

One fund, for example, might charge an administration fee of 1 per cent while another might charge three different fees of 0.3 per cent, 0.3 per cent and 0.4 per cent for the same service, in the hope the fees will appear cheaper.

Fees can also be charged on a flat dollar basis or as a percentage of your investment. Flat dollar fees are undoubtedly clearer. You see in black and white exactly how much you're paying, which is why fund members tend to like them and parts of the industry don't. While percentage fees often sound trifling, they can soon mount up, especially as your account balance grows.

Industry guidelines encourage funds to provide a dollar estimate of the total fee cost on a $50,000 investment but, as the head of research company Chant West, Warren Chant, points out, this still doesn't allow consumers to compare apples with apples.

After 15 years researching super funds, Chant is scathing of the industry's approach to fee disclosure. He says the government needs to regulate how fees are calculated and disclosed, as the industry seems incapable of coming up with a standard form of disclosure. But in spite of the government's promises that its proposed MySuper reforms will make super funds more transparent, he has seen nothing that will address the problems.

Forcing funds to disclose their fees is one thing, he says. But you need to be sure that fees are calculated in the same way and that no hidden fees slip under the radar.

Last year Chant West looked at the disclosure documents of the 30 largest industry super funds and the 30 largest retail funds. It had to make 39 adjustments to the fees disclosed before it was satisfied all the fees were comparable and a further 107 adjustments to disclosure of insurance premiums and investment returns.

Let's just take one of the simplest fees - that flat-dollar administration fee. While the regulatory guidelines say all fees should be disclosed before tax, some report the fee net of tax - making it appear cheaper.

Assume the annual admin fee is $100 before tax. The fund gets a 15 per cent tax deduction for the cost of administration, which is then passed on to the member, reducing the after-tax cost to $85. But Chant says some funds charge a net fee of $85 and don't pass on the tax deduction. Both cost exactly the same but which would you choose - the fund that reports its fee as $100 or the one reporting $85? You need to check the fine print to see whether they are gross or net of tax.

Chant says an even bigger discrepancy can occur where funds employ a fund-of-fund manager to look after some of their investments. This often happens with hedge funds or private equity, where the "top" or fund-of-fund charges a base percentage fee plus a performance fee, then farms the job of investing the money out to a range of specialist managers who charge similar fees.

While super funds will generally include the "top" manager's fees when they disclose investment costs, Chant says it is rare that the fees charged by the underlying specialist managers are also disclosed. This can make those that do disclose, such as AustralianSuper, CBUS and CareSuper, look more expensive than funds that omit these costs.

Chant says depending on the level of performance fees charged (and they can typically be as high as 20 per cent of any return in excess of zero), it is not hard to come up with a total fee on that investment of 6 per cent to 8 per cent.

Chant says, given the average default fund's exposure to these types of arrangements, default option fees can be understated by about 0.4 percentage points a year if the full fee impact is not disclosed. That is a material difference.

Other discrepancies occur with estimates of the cost of member protection and Chant says insurance costs are a minefield all of their own. Yet, so far, none of the reviews or proposed reforms have adequately addressed these issues.

If the government actually wants to make funds more transparent, it seems the logical place to start.