We talk to First State Super’s Head of Product, Amanda Ralph, about super fund fees and what they mean for you.
One question we often hear from our members is, “Why are there so many fees?” Wouldn’t it be easier for everyone if there was just ONE fee, which would also make it much easier to compare funds?
Amanda: I agree that a single fee would be easy to understand and compare. Unfortunately, we can’t report a single fee because there are strict rules governing what fees we disclose and how we disclose them. These rules require funds to ‘unbundle’ their fees so that members know exactly what they’re paying for, which can mean providing a lot of detailed information.
Can you outline the different types of fees that members pay?
Amanda: In broad terms, there are two fees members pay: administration fees, which cover the cost of managing the fund and our members’ accounts; and investment fees, which reflect the costs of investing member account balances and contributions across our different investment options.
That seems simple enough. So, where’s the complexity and confusion?
Amanda: Well, the complexity comes from the ‘unbundling’ I mentioned a moment ago. Breaking down fees into their component parts is meant to make things clearer for members, but it doesn’t necessarily do that. Our administration fee, for example, has two parts: a flat membership fee of $52 a year plus 0.15% of accumulation account balances and 0.4% of income stream account balances.
Our investment fees reflect the costs we incur in managing our investment portfolio and can vary from year to year. The investment fee for our Balanced Growth option for the year ended 30 June was 0.76%^1. But for disclosure purposes — on our website and in our Product Disclosure Statement — we have categorised the amounts that make up this figure. These include investment management costs, performance-related costs, transaction costs, and other fees and costs such as audit and custody fees. For anyone trying to understand fees, it can be a bit overwhelming.
Some funds also charge a switching fee if you change investment options and an exit fee if you leave the fund, although we don’t charge these fees at First State Super. And there can be fees for advice, and fees for services relating to family law disputes. On top of that, most members pay insurance premiums, although that’s not a fee as such.
There’s a lot of devil in the detail.
Amanda: I agree that when you break it down, it’s sounds like a lot. But that’s the same with any service payment. Take your car service for example. It might cost $800 but that includes checking the oil filter, brakes, coolant, power steering, shock absorbers, suspension, lights, wheel alignment, tyres, electrics and so on. There’s a separate cost for every one of those activities.
What sort of activities are we talking about?
Amanda: The administration fee covers operational activities like processing contributions, switches and withdrawals, and maintaining and updating account records and online services including our website and secure online transaction facility. It also covers the cost of mailing annual statements and half-yearly newsletters (which include important information we are required by law to report to members), and member support services such as our phone-based customer service team.
The investment fee covers the costs associated with the purchase, sale and ongoing management of the fund’s investments. These amounts are paid mainly to external investment managers, but they also cover fees paid to third parties such as our custodian, brokers and government authorities.
How much exactly are these fees? You mentioned a few percentages before but sometimes a dollar figure is more meaningful.
Amanda: Well, the annual dollar fee figure varies depending on your account balance so let’s look at an example for a $50,000 accumulation account balance. The administration fee is a flat $52 a year plus 0.15% of the $50,000 balance, which is $75. This gives us a total of $127 in admin fees. Then we calculate the investment fee, which was 0.76% for the Balanced Growth option for the 2017-18 financial year, which equals $380. So, if your balance was $50,000, then for that year you would have incurred total fees of $507, which is 1.01% of your account balance. Most members would also pay insurance premiums on top of this.
Are some investment options more expensive than others?
Amanda: Yes, they are. The investment fee varies across investment options because it’s more expensive to manage assets like private equity and property than shares, fixed interest and cash. Our estimated investment fees, for accumulation accounts for the year ended 30 June 2018 ranged from 0.05% for the Cash option to 1.23% for our Property option. The annual fees for our two most popular options – Growth and Balanced Growth – were 0.8% and 0.76% respectively.
The difference between an annual fee of 1% and 1.5% doesn’t seem like much. Can it really make a big difference to your final account balance?
Amanda: Fees and costs matter and can have a substantial impact on investment outcomes. For example, assuming identical investment returns, a 20-year member paying 2% rather than 1% could be as much as $40,000 worse off at retirement.
However, it’s also important to keep in mind that the returns you receive depend on a range of factors, not just fees. Some asset classes involve higher fees and costs e.g. property, infrastructure and private equity investments. While we are mindful of the fees and costs our members incur, we believe investments in these asset classes are important as they help diversify risk and enhance returns for our members (even after accounting for the total fees paid).
Are all fees deducted directly from members’ accounts?
Amanda: No, they’re not, which brings me to another area that can be a bit confusing. Administration fees and insurance premiums are deducted directly from member accounts, while investment fees and costs are deducted from the asset values of the investment option before the unit price is calculated. This is why fees are shown in two separate categories on member statements: direct fees, and other fees of your investment. The different categories are explained in member statements but even so, it can be a lot to digest.
What’s the easiest way for members to check how much they’re paying in fees?
Amanda: Read your account statement. This shows direct and indirect fees, investment returns, transactions for the period and insurance details. You can also check the fund’s website or Product Disclosure Statement. All funds are legally required to publish information about their fees.
What are the top three things members should think about when assessing fees?
Amanda: While it’s important to avoid paying high fees, it’s even more important to look at the net return you receive, which is your investment return after fees and taxes. The higher your fees, the less you’ll have available for investment.
Make sure you understand the difference between direct and indirect fees. Whether fees are deducted directly from your account or from the assets of the investment option, the net effect is the same.
Finally, the only way to know if you're paying high fees is by finding out what your super fund is charging you and comparing the cost to similar funds. Check your super statement to see how much you’re paying, then compare these costs with the fees shown on other super funds’ websites or via the Chant West Apple Check.
Head of Product
Investment fee applicable for accumulation and transition to retirement income stream members. The estimated fee for retirement income stream members was 0.75%. ↩
This is general information only and does not take into account your specific objectives, financial situation or needs. Seek professional financial advice, consider your own circumstances and read our product disclosure statement before making a decision about First State Super. Call us or visit our website for a copy. Issued by FSS Trustee Corporation ABN 11 118 202 672, AFSL 293340, the trustee of the First State Superannuation Scheme ABN 53 226 460 365. Financial planning services are provided by State Super Financial Services Australia Limited, trading as StatePlus, ABN 86 003 742 756, AFSL No. 238430. ↩