Take the cream from super fat cats

PETER Costello, we agree with you about excessive superannuation fees and charges. We share your anguish about how such expenses erode investors' superannuation holdings, and agree there should be closer scrutiny of the actual returns on funds invested. There are streams of administration charges, insurance premiums, fees for withdrawing funds or for switching investment strategies, plus fees and performance bonuses paid to external fund managers. The investment fees alone account for about half ...

By InvestSMART · 8 Nov 2012

By InvestSMART ·
8 Nov 2012

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These expenses can run to thousands of dollars a year for moderate accounts. And when investment returns are insipid, as they have been since 2008, investors might be forgiven for thinking their hard-earned sums are paying for someone else's retirement. Still, you undermine your argument, Mr Costello, by implying industry-based funds are the worst perpetrators of excess in this area. Nice try. A swipe at unions on the way through is probably to be expected, but the focus really should be on the fat cats who have feasted on the superannuation system for more than two decades.

On the whole, these are white-collared professionals, not union members, and they operate in a competitive free market. They are accountants and auditors, actuaries, lawyers, insurance managers, fund managers and more.

While some of the government's current super reforms will eventually put downwards pressure on super funds' administration fees, some real muscle should be applied by trustees to the fees paid to external fund managers. No one is suggesting their fees be regulated, but there remains little incentive for them to cut their fees. The problem is that fund managers are paid a percentage of the value of funds under management, regardless of whether they achieve a positive return. A poor return might lose them a mandate and outperformance generates a bonus, but mere level-pegging with the rest of the industry still pays generously.

Australia has about $1.35 trillion of super funds. As the compulsory contribution rises to 12 per cent, that figure will swell all the more reason to insist on transparency and accountability from those who administer and manage funds. Investors should get far more information about how much goes to trustees, fund managers and others, and more about returns. These long-term investments are essential for supporting our ageing population in future decades. They should not be squandered by a privileged few in the financial sector.

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Frequently Asked Questions about this Article…

What kinds of superannuation fees and charges should everyday investors watch for?

Common superannuation fees include administration charges, insurance premiums, fees for withdrawing funds or switching investment strategies, plus investment fees and performance bonuses paid to external fund managers. All of these can erode your retirement savings over time.

How much do Australians pay in superannuation fees each year?

The article cites an estimated $16 billion a year in superannuation fees and charges. Investment fees alone are said to account for roughly half of that total, and for moderate accounts these expenses can run to thousands of dollars a year.

What portion of super fees are investment fees versus other charges?

Investment fees make up about half of the estimated $16 billion a year paid in super fees and charges, with the rest made up of administration costs, insurance and various transactional fees.

Why are external fund manager fees a particular concern for superannuation investors?

External fund managers are typically paid a percentage of funds under management regardless of whether they achieve positive returns. That payment structure means there is often little incentive for them to cut fees, and investors can end up paying generously even when returns are mediocre.

Will government superannuation reforms reduce fees for members?

According to the article, some current government reforms are expected to put downward pressure on super funds' administration fees over time. However, the article argues that more forceful action — especially from trustees — is needed to rein in fees paid to external fund managers.

How do high superannuation fees affect my long‑term retirement savings?

High fees erode investment returns, which is especially damaging over the long timeframes typical of superannuation. With investment returns described as insipid since 2008 and fees possibly costing thousands a year for moderate accounts, charges can significantly reduce the final balance you rely on in retirement.

Who benefits from excessive superannuation fees?

The article points to a cohort of white‑collared professionals — accountants, auditors, actuaries, lawyers, insurance managers, fund managers and others — who have profited from the superannuation system. It characterises these beneficiaries as the "fat cats" who have feasted on super fees for decades.

What transparency and accountability should investors demand from their super funds?

Investors should insist on clearer reporting about how much of their contributions go to trustees, fund managers and other service providers, and on better information about net returns. With about $1.35 trillion in super funds and compulsory contributions set to rise toward 12%, the article argues for greater transparency to protect long‑term retirement savings.