In my last post I noted that AustralianSuper's fees on their Indexed Diversified option increased last year. While this was disappointing, we should keep things in perspective and look at the big picture.
At the end of the day, 0.21% p.a. is still extremely inexpensive for a well-diversified set of index funds. Other than the the exceptional offering from HostPlus there's really nothing better in the marketplace. And a cursory investigation into the availability of automatic insurance on joining suggests that AustralianSuper has more to offer if you want to have Life and TPD insurance in your super and want to minimise the hassle of a screening process (unless your employer uses HostPlus as their default - lucky you!) For my Mum I've recommended HostPlus as she doesn't need such insurance at this stage. For my partner I'm more likely to suggest AustralianSuper.
This had me thinking more generally about where we are in Australia with fees on Superannuation funds. Since the introduction of MySuper funds at the start of the year fees on average don't appear to have dropped that much. But it is a start - fees on default products have improved but there are still a lot of legacy products and expensive products left in the marketplace.
As an indicator, the big banks all have basic Super products with asset-based fees in the range of 0.5% - 0.8% p.a. Even AMP now has a MySuper product at 0.65% p.a. (but be aware that any customisation at AMP becomes increasingly expensive). While that's still more than HostPlus or AustralianSuper it's a vast improvement in just a few years.
So if things have improved, what are the big (and smaller) fee issues out there now?
Firstly, existing balances in default products don't have to be converted to MySuper products until 2017. This gives unscrupulous funds some time to extract more in fees. There even appears to be cases where a separate company has been set up with a more competitive MySuper fund. What this means is that existing balances can't be rolled into the more competitive fund automatically, giving another opportunity to get/keep people in less competitive funds.
Secondly, there is the potential for high fees to be charged by affiliated planners to put consumers into higher-fee funds. It is unclear how widespread this is or will be. But the bottom line is if you're paying more than 1% p.a. you'd better be very clear on what value you're getting for that money. There are places where a financial planner can add value. But by itself choosing an asset allocation should not be that expensive or needed so frequently that you're paying an annual fee. What my parents did was to see a planner associated with one of their industry funds, pay up-front (still much less than 1% as a once-off) for a financial plan when they were close to retirement, and pay a few hundred dollars for a follow-up every few years when needed.
Thirdly, perhaps a smaller issue, is fees versus value. I'm unconvinced of the value of active management of equities, and there's plenty of evidence to support that particularly for the large stocks that form the majority of equities in Super. But accessing assets like unlisted infrastructure and property are a more expensive proposition and may provide some diversification benefits. Reasonable people can disagree on whether it is worth paying a bit more for these. However it is clear that fees of 2% p.a. as still exist in some retail products will almost never be worth paying; they will struggle to overcome the drag of those fees and there are just better-value products in the market.
So if you want such assets in your Super, I won't judge you (I even had posts on some in the past). Just include them in a cost-effective manner. For example, Australian Super's Conservative Balanced fund (which doesn't seem all that conservative) charged 0.41% + 0.03% in performance fees last year and has a target ('strategic asset allocation') of 25% in Direct Property and Infrastructure. That's the best value I've found for such an allocation but most Industry Super funds will have a reasonable quantity of Property and Infrastructure while keeping fees in-line with the banks' pure index products (and as with Australian Super many can beat the banks on pure index products for those of us so inclined). And if you want something in-between, a mix of AustralianSuper's Conservative Balanced and Index DIversified funds can be used. For example 40% Conservative Balanced and 60% Index Diversified will get you a target allocation of 10% in unlisted assets. All for about 0.3% p.a.
Fees might not be everything but they can make a big difference to the final balance which funds your retirement income. Be aware of what you are paying and make sure you are getting value for money.
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