The superannuation industry collects a lot of fees to make the system work - over $30 billion annually. This is more than many Olympic swimming pools of cash or whatever other colloquial metaphor is used. And in the past year fees have grown faster than the underlying assets.
For the average member fees equates to around $600 a year, or more than $50,000 over a lifetime. The sticker price of the total fee for the product is another headline that can confuse. For example, the average fees for MySuper products offered by retail funds are now lower than the average fees for MySuper products offered by the not-for-profit (NFP) sector.
However the message in all of this is not as clear as may first appear.
The majority of the headline fee increase was due the stroke of the ASIC regulatory pen which changed how investment fees are disclosed, particularly impacting industry funds. Over $2 billion in additional fees were notionally collected under the changed rules. This no impact on net returns to members, it simply cast the net deeper into the levels of investment activities between the member and the underlying real assets.
For the individual the headline fee is composed of two parts - one part for administration, and the second part for investment of the assets. Both are important, are calculated differently, and importantly a member may choose an alternative investment option with a lower fee without changing products.
Firstly let's talk about administration fees.
There is about $4 billion in administration fees collected by NFP funds and $6 billion in administration fees collected by retail funds. Underlying this, the average administration fee for NFP products is less than half that of the average retail product (0.30% compared to 0.70%).
The other thing to note is that administration fees are coming down in both notional and real terms. Many NFP funds have a fixed dollar fee of around $80 a year which remained the same for many years while average balances and fund administration complexity has increased. Partly this is from economies of scale, as for both retail and NFP funds administration fees are meaningfully lower.
Now let's talk about investment fees.
Investment fees are almost universally calculated as a percentage of assets. So as member assets and industry assets grow, so too do the fees collected from investing them. While investment fee ratios have fallen year on year (with the exception of the latest bounce from RG97 disclosure) they have not shown the same economies of scale effect as has been seen on the administration side.
There are cheaper investment options in the market that can be chosen, particularly those based on index or ETF options with low exposure to unlisted assets. This is the basis of the investment approach of many of the newer millennial disrupter funds who seek a competitive headline fee as they cannot match the lower administration fees of larger funds.
A member can often choose these lower price index options within their existing fund if lower fees are the primary aim. While the average fees for a default investment option is 0.85%, the average fee for an investment option based on indexed equities is less than 0.3%.
As with many things there is a difference between cost and value. For example, diversified options with exposures to unlisted assets and some active management have typically been the superannuation investment options that have provided the highest returns to members over the long terms, despite having higher headline investment fees than index funds.
Large industry fee totals or comparative headline product fees can be dazzling. However there are some downward trends in fees that are still occurring, and at the product level, breaking the fee into parts can go a long way to demystifying the measure.
Written by Stephen Fay, head of superannuation research, Rainmaker.