The cost of more cash

The biggest determinant of what your super will be worth at retirement is not the performance you get but how much you pay to get it.

It's not the performance of your super fund but the fees that will matter in the long run, writes Nathan Bell.

From July 1, your employer will be paying slightly more into your super fund.

Between now and 2019, the superannuation levy will be gradually increased from 9 per cent to 12 per cent. The first increase, to 9.25 per cent, will occur at the beginning of the new financial year.

The idea behind the rise is you'll have more to retire on.

But your final balance will probably end up being less than you think.

Why? What looks to you like a richer retirement looks even better to the assorted advisers and managers clipping your super ticket on the way through.

All superannuation funds charge a percentage management fee. In absolute terms, that means you'll be paying an extra 33 per cent in fees in six years' time.

Here's what you can do about it.

The 20 largest super funds in the country, including AMP Superannuation Savings Trust, AustralianSuper and Colonial's FirstChoice Superannuation Trust, control almost 40 per cent of all super money. And yet, according to the regulator APRA, none of the 20 largest funds made it on to the list of the top-20 best-performing funds during the past five years.

There's a reason for that.

These funds are so big that outperformance, which is what many super investors think they're paying for, is beyond them. Big super funds can't beat the market because they are the market.

If you're intent on staying with a big fund - and there's nothing wrong with that - you're probably concentrating on the wrong thing.

Preserving and growing your superannuation nest egg is more about fees than performance.

When you add in all associated costs and fees, most funds charge 1 per cent to 2 per cent a year of funds under management. And fees take a large chunk from the compounding effect of saving over the very long term.

According to Perennial Investment Partners, real returns (accounting for inflation) from investing in the ASX All Ordinaries Index have been 7 per cent a year during the past 30 years.

Your super fund is creaming off somewhere between 14 per cent and 28 per cent of that figure. In more exotic or specialised funds it's almost certainly more.

The lesson, then, is to concentrate less on your fund's performance and more on what you're paying to get it, because it will almost certainly be average anyway.

The retail-funds industry, in particular, would prefer you didn't explore alternatives, but there are plenty of them.

First, large non-profit or industry funds have tended to deliver better performance at a cheaper price than large retail funds.

According to APRA, five of the country's largest super funds, including AustralianSuper and UniSuper, made the top-20 performers over nine years. All were non-profit funds, which tend to charge lower fees.

If you're in a large retail fund, chances are a switch to a large non-profit fund will pay off over the long term, delivering lower fees and better after-cost performance.

Second, if you're a more sophisticated investor who manages your own super fund, exchange-traded funds (ETFs) and listed investment companies (LICs) offer a greater choice at lower cost.

You can purchase ETFs, which offer a huge range of exposures, much as you do ordinary shares, for lower fees than a super fund charges. Beware, though: synthetic and exotic ETFs contain traps for the unwary.

As for LICs such as Australian Foundation Investment Company and Argo Investments, they operate like large fund managers - AFIC, for example, manages $4.7 billion, invested mainly in the top-20 ASX-listed stocks - except that you can buy the company's shares. It manages its portfolio on your behalf, deducting just 0.2 per cent a year for the privilege.

If you're looking for a sensible, low-cost exposure to shares, these are attractive options for more sophisticated investors.

Even if that's not you, be sure to avoid the mistake of concentrating on the wrong metric. If you're in a large fund, the chances are you'll get average performance before fees.

The biggest determinant of what your super will be worth at retirement is not the performance you get but how much you pay to get it.

If you can cut your super fees down from, say, 2 per cent to less than 0.5 per cent, over the decades this simple decision could be worth hundreds of thousands of dollars.

This article contains general investment advice only (under AFSL 282288). Nathan Bell is the research director at Intelligent Investor Share Advisor,

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