Getting fees below 1% is the superannuation key

Think you have a good superannuation fund?

If so, you should check on the total level of investment and management fees within it and make sure they are below 1%.

That magic number came out of analysis from Rainmaker Information which confirmed that the continued pressure to lower super fees has paid off.

About 60% of super providers have cut fees in the past year with the average fee now having fallen by a quarter over the past decade to hit an average of 1%.

That means that for your fund to be a good performer on the fees front, it really needs to charge below 1% to make the grade.

Overall results really matter

There are a few qualifications to make on that rough rule of thumb, the most important being that the net performance figure is the real comparison that matters because some funds may be a bit more expensive than others but that doesn’t matter if their results are also better.

The other qualification is that these numbers are based on MySuper accounts, which cover 13.5 million Australians – enough to give a good representation but still not covering the entire raft of not-for-profit and retail funds.

The race to cut fees shows that they are a critical factor when it comes to comparing funds, particularly in an environment in which the worst MySuper performers are exposed by an Australian Prudential Regulation Authority (APRA) performance test.

Turns out it really focusses the minds of super providers when they are forced to send letters to their members owning up to being a poorly performing fund and face not being able to sign on new members if they continue to underperform.

Fee pressure driving mergers

This pressure is also driving a wave of fund consolidation, with smaller funds embracing the lower costs that come with greater scale.

The Rainmaker numbers showed that UniSuper had the cheapest total expense ratio for a public offer product at 0.65%, followed by Bendigo SSSE and AMG Corporate on 0.70%, Virgin Super Employer (0.73%) and QSuper Accumulation (0.74%).

The rest of the top ten included Suncorp ESB (0.77%), AustralianSuper (0.77%), AMIST Super (0.81%), Rest (0.89%) and EISS Super (0.89%).

Ideally you want your super fund to have a strong investment performance over at least five years and to also have low fees and the good news is that retail funds have been slicing their fees to compete better with the industry funds.

While retail funds still have higher fees overall than industry funds, they are catching up, with four of the ten cheapest MySuper products being retail funds.

The average Australian now pays about $2200 in super fees each year, which is a slight increase in dollar terms but lower in percentage terms due to higher balances.

The next pressure point for both retail and industry funds will come with passive investment strategies, with indexed super options charging an average of just 0.12% in fees because they don’t need to pay investment managers.

More super funds are now considering changing chunks of their investments to low-cost index strategies as a way to keep fees falling.

All of this is great news for super savers, whose retirement balances improve as fees fall.

Indeed, if fees keep falling at the current rate, the average in another five years would fall as low as 0.85%.