Friday, 28 March 2014

Superannuation Funds - How important are fee differences?

All working Australians will have some form of super.  Most of us do not have the time, skills or savings balance necessary for a Self Managed Superannuation Fund so we just go into our employer chosen superannuation fund or another fund of our choice.  These are generally split into retail and industry superannuation funds and all of us would have seen the advertisements on television advocating the superior returns offered by industry funds over retail funds.

Choosing your super fund is not exactly like choosing a managed fund

Super funds most often operate as a fund of funds.  Although some of them are starting to build out their own internal investment capability, most of them actually just outsource the investment task.  That is they pay fund managers (the same people who offer managed products) to invest for them.  Because they are placing such large amounts they can generally do this for quite a low cost.

I have no real preference for superannuation funds which manage the money themselves versus those which outsource the task.  There are pros and cons for both which I will go into in a post next week but they are quite different to evaluate.

If you invest in a superannuation fund that manages money themselves then you will be assessing them in the same way you would assess an ordinary managed fund provider

  1. What is the investment process?
  2. Who are the people running the fund, how long have they been there and what has their track record been?
  3. How stable is the investment team?
  4. What sort of alpha are they aiming for?
  5. What are the fees they are charging to achieve this alpha (out performance)?
If you are investing in a superannuation fund that uses external fund managers then this is not what you are thinking about.  Fund of fund providers are notoriously hard to evaluate - how do you evaluate someones ability to choose a fund manager. Do not fall into the trap of looking at historical performance - anyone can choose the right fund manager at the wrong time.  If you are choosing this type of fund you really want to be making sure
  1. That they are not 'asleep at the wheel' - i.e. when they do have an under-performing fund manager they boot them or at least have a very good reason why they keep them; and
  2. What fees are they charging for the service of assessing external fund managers
Although it looks like choosing a superannuation fund that manages it's own money is the more robust option - this is actually not always the case.  You are as likely to make a mistake in choosing your fund as the super fund who goes out and does it for you - but in their case they spread the risk over several different fund managers while you are limiting it to one fund manager.

When it comes down to it...the thing you should be focusing on is the fees your fund charges

In the end your first and foremost consideration when choosing your Superannuation Fund should be the fees that it charges.  It is not that all superannuation funds will get the same returns over time - they wont - but it is close to impossible to work out which superannuation funds will do better over the long term - there are just too many moving parts and variables which constantly change.

If we don't know which funds are going to outperform but we assume that we'll get reasonable performance from the funds themselves then you want to minimise the leakage that comes through things like fees.  The difference in fees is massive.  Industry super funds charge ~0.60% - 0.80% while retail and other for profit funds can charge fees that are more than double this.  This leakage over time can cost you a significant amount.

You may not want to go for the cheapest fund - sometimes a slightly more expensive fund can offer flexibility that you are looking for.  In fact I recently recommended to my girlfriend that she pay a little bit more for her employer chosen super fund because they provided a really good insurance plan that she couldn't have gotten through a cheaper fund that she was looking at.  But there was only a 0.07% difference in fee and she has quite a low superannuation balance so paying more at the moment is worth it for her.  However it is almost never going to be worth paying 1% more for your superannuation funds.

A final word of warning...

Superannuation funds try and differentiate themselves in a variety of ways - make sure you are offered real value before you decide to pay up for this differentiation.  

I recently noticed a superannuation fund that was charging ~2% (all in) for 100% ethical investments.  I have written before about how ethical investments should not cost significantly more than other investments because the investment process is not 'harder' nor does it cost more.  This fund was not investing money themselves - they appointed external managers to invest in ethical products for them and then they were making a profit on top.  2% is a ludicrous fee for a fund of fund manager...even an "ethical" one.

Paying for differentiation is fine but don't get ripped off.  If you do want a certain product see if you can get the same thing for a lower cost.  Don't forget that what you're doing is investing for your retirement an the compounding effect means that small differences now can make large differences to your retirement at the end.

You May Also Be Interested In


  1. What are your thoughts on fees vs performance..
    I.e. if you have a fund that is perfoming @ 10% return over 10 years with an ICR of .39% vs a fund that had a 14% return over 10 years with a 1.39% fee?

    I know that past performance does not reflect performance etc but always wondered this

    1. Absolutely - if you can find a fund which for the same level of risk (and that is an important thing to remember) can achieve a higher return which more than covers the fee - then you should absolutely go for it.

      The problem (as you identified) is not knowing the relative performance of funds in advance and so as outsiders the only thing we can assess are fee levels and the level of expertise and the practices of the fund we are investing in. If the level of expertise is the same, the practices and investment process is similar (i.e. you don't believe you've found a fund which has the magic sauce) then the last thing left is the fees