When choice of superannuation fund legislation was introduced, it did not apply to everyone. According to some awards and enterprise agreements, employers were required to contribute to one or two specified funds. In addition, despite there being a requirement for super funds to properly disclose their cost structure, this has never been enforced.
This lack of transparency when it comes to super fund costs is one of the reasons MySuper is being introduced. Even after the introduction of MySuper, which will really only be a low-cost alternative for people not wanting to take any interest in their super, the job of assessing what super fund is best is made harder because of the deceptive conduct of some commercial super funds.
The costs that affect a member's superannuation account are made up of two distinct types. The first are administration costs relating to keeping the records of the fund up to date. The second costs relate to the producing of investment income for the super fund.
Industry super funds have said their administration costs are significantly lower than commercial super funds. Despite industry super funds in most cases being very similar, the administration fees charged by funds can differ greatly. In some cases a flat low membership fee is charged, while in others an additional expense recovery fee is also charged.
Some commercial funds, in trying to compete with industry funds, have tried to give the impression that they also charge very low administration fees. But upon closer examination it becomes clear administration fees are received as increased investment charges. This makes the task of comparing superannuation almost impossible.
The only way to establish whether administration fees are hidden in investment charges is to compare the investment cost charged by a super fund with those charged by the same manager to wholesale investors. The difference in investment charges can apply to not only investments in the Australian and international share sectors but also to the cash and fixed interest investments offered.
The increase in the investment fee charged averages out to approximately 1 per cent. For a member with $100,000 in superannuation this results in extra costs of $1000 a year.
When comparing super fund costs it is also important to understand that there can be a difference between fees charged for members with an accumulation account and fees charged for a pension account. This is often due to the increased administration costs relating to maintaining a pension account.
Fees are not the only consideration that should be taken into account when assessing what superannuation fund is best. This is especially the case when someone is assessing what super fund will be best for them once they are in pension phase.
Some super funds offer less investment choices for members in pension phase compared to those in accumulation phase. In addition, rather than paying income earned into a cash account that pays the pension, some super funds reinvest the income into the investment. This can mean a member must have large amounts invested in cash, or they could be forced to sell investments when their value is depressed, to fund a pension payment.