Confused by the super fund fees structure in Australia? You’re not alone! Here’s a superannuation fee structure summary to help you gain a better understanding.
There are two major super fund fees:
1. The administration fee
The first super fund fee is the Administration Fee. This can be either percentage-based or a fixed amount, say $1.50 per week.
Some super funds will tier the administration fees, for example, 0.50% p.a. on the first $100,000, 0.40% p.a. on the next $150,000 etc., decreasing progressively, the higher the balance.
The administration fee is generally how the superannuation fund covers costs in running the super fund.
2. Internal Cost Ratio
The second is the Internal Cost Ratio (ICR). This is a measure of the overall cost to manage specific investments in the super fund, as a percentage. This is also how the fund manager is paid.
Sometimes this percentage will include a ‘performance fee’. This is paid to the fund manager for exceeding a benchmark. It can, therefore, act as an incentive for the fund manager to have better performance.
It’s not always about the lowest fee
The ICR can be a simplistic measure. Whilst in general, you would seek as low an ICR as possible, the net returns after these fees are more important.
For example, the Magellan Global share fund has a high ‘Management Expense Ratio’ (MER) fee of 1.35% p.a.. And the ICR (the total cost including all fees such as the performance fee) is even higher at 1.49% p.a.
However, this fund has returned 15.73% p.a. net of fees for the past 5 years. (Source: Morningstar, to 31st October 2019) Far exceeding its benchmark.
Another example is the Pendal Mirocap fund. With a high ICR of 1.66% p.a., yet has returned 17.92% p.a. net of fees over the past 5 years (source: Morningstar, to 31st October 2019).
A return of 17.92% p.a. net is far more attractive than a fund with a low ICR that has returned only 10% p.a.
Other super fund fees
Ongoing adviser fee
If you have an adviser providing ongoing advice you will have an additional ‘ongoing advice fee’. In the past, many advisers have charged a percentage-based fee. This means that, as your super balance increases, so too will the adviser’s fees.
At Mike Beal Financial Planning, we charge a fixed, set fee if your situation warrants ongoing advice. I believe this offers greater transparency.
For smaller balances or situations where there is not a great deal of complexity, an ‘ad hoc’ fee arrangement may suit you better. For example, a meeting once per year whereby a fee is charged specifically for that meeting and the advice associated with it.
Most funds will have a default level of cover for which you are charged a premium. You may not have any debt or dependents and therefore you may be paying for something that you do not need.
There may also be other, smaller costs. Relating to regulatory costs, also for ‘exit fees’ when leaving the fund, or ‘switching costs’ for switching investments within the super fund.
There will also be a ‘buy/sell’ cost. This is the cost incurred for purchasing or selling an investment within the super fund. The more complex the investment, the higher this buy/sell spread may be.
For example, it may be only 0.1% for many investments, but certain share funds may have buy/sell costs of up to 0.7%. Hence you need to be wary of these super fund fees before changing any investments within your super fund.
Get the right advice
In general, you should be looking for as low a fee structure as possible as these fees can substantially erode your returns. For example, if a super fund return is 6% p.a. & you’re paying 1.5% p.a. in super fund fees, a quarter of your return is being wiped out by fees.
However, as explained above, it’s not always best to choose the lowest fee, if the returns are better than others. Therefore, the best thing to do is to gain the advice of a professional financial advisor. They can tailor a solution for your unique circumstances.
For further advice on super fund fees feel free to contact your Maroochydore financial planner, Mike Beal, on 0409 799 279 or [email protected].
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.