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$200k super fee trap: are you in a 'fat cat' fund?

Lex Hall  |  29 Aug 2019Text size  Decrease  Increase  |  
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Australians risk losing up to a quarter of their superannuation balance by retirement because of hefty fees charged by “fat cat” super funds, research by online investment adviser StockSpot suggests.

ANZ and AMP have been singled out as charging the highest fees, which could cost the average Australian up to $200,670 by retirement.

The average “fat cat” super fund charges 2 per cent in fees per year, compared to “fit cat” funds, who charge less than 1 per cent a year, says StockSpot chief executive Chris Brycki.

“I know 1 per cent doesn’t sound like a lot but for the Aussies stuck in these fat cut funds, they’ll be worse off by $200,000 or more compared to their friends who are in a low-fee fund.

“One of our golden rules of super is: the less you pay, the more you get. Always, pay less than 1 per cent in fees so your super isn’t eroded by high fees.”

Brycki singles out ANZ/OnePath and AMP as among the main offenders when it comes to high fees, accounting for more than half of worst 40 fat cat funds. Perpetual, MLC and Zurich are also cited.

Worst 'fat cat' super funds in 2019

worst performers

Among the “fit cat” funds, QSuper comes out on top. Fit cat funds charge less than 1 per cent. QSuper has nine funds in this category; UniSuper has six and Australian Super has two.

“There are twice as many high fee funds that charge more than 1 per cent a year, than low fee funds charging under 1 per cent a year,” says Brycki.

“Sadly, in the seven years of naming the worst performing fat cat funds, few people have moved out of these funds.”

Best 'fit cat' super funds in 2019

best performers

Byrcki says his research shows that indexed super options beat 90 per cent of all super funds over five years, yet the bulk of super funds do not index.

“Aussies in default super funds would benefit if all their super money went into a low-cost index fund,” he says.

Average 5-year fund performance by super option as of June 2019

Average 5 year return by super option

Source: StockSpot. Returns are after investment fees and taxes for an accumulation super member.

Brycki says super managers can easily access index funds yet many choose not to because there are conflicts of interest.

“Not one moderate or conservative super fund was able to beat the StockSpot’s most conservative indexed option over five years,” Brycki says.

“People who manage their own super via a self-managed super fund and invest in index funds have been able to beat even the largest super funds by indexing.”

Brycki’s estimate of $200,670 assumes a 35-year-old earning a typical salary of $78,192 with an existing super balance of $56,732. “A typical fat cat fund charges 2.07 per cent versus a fit cat fund, which charges 0.97 per cent.”

Brycki says the government must take action to ensure Australians are aware of high fees.

How to find the right super fund

1. Find the right type of fund based on your capacity to take risk

According to StockSpot, the balance between risk and return potential should be the main consideration when working out the right the mix of different investments in your super fund. The further away retirement is, the greater amount of risk you can take.

“For most people, we suggest the below mix of investments provides the right balance to maximise long term returns, reduce short term risk, keep up with inflation and increase financial certainty towards retirement”.

age and investment mix

Asset class type – getting the right mix of growth and defensive assets

Growth assets (typically shares and property) have the potential for higher returns over the long-run. But they pose a higher risk of negative returns in the short run.

Defensive assets (bonds and cash) provide more steady returns and help to cushion periods of negative share market returns when markets dip.

Accumulation phase – what’s important

It’s crucial to consider “sequencing risk”, says Brycki. This is the risk that the order of when you receive returns may affect your retirement balance. Diversification and appropriate asset allocation are crucial to preserving the amount of super you have accumulated.

Lifecycle strategies are becoming increasingly popular with super funds. These funds reduce your allocation to growth assets as you get older. Many lifecycle funds have high fees so selecting a low-cost option is key.

The following StockSpot table shows average returns of a simple portfolio of shares and bonds since 1900 to illustrate how risk (and returns) increase as you reduce bonds and cash in a portfolio.

Brycki has also included the probability of a 10 or 20 per cent loss to show how bonds cushion the impact of negative years in the share market and reduce the chance of significant losses.

“On the other hand, the more cash and bonds you own, the lower your chance of achieving a 4 per cent ‘real’ return (above inflation) over 10 years.”

Fund type and returns

2. Choose a super fund with low fees

According to StockSpot, cheaper super funds tend to outperform higher-cost alternatives across all categories.

Over the past seven years, funds that charge less than 1 per cent a year have done better, Brycki says.

“Australians would benefit greatly if they simply looked for a super fund with suitable risk for their age, and the lowest possible fees. A simple, low-cost indexing strategy achieved top quartile returns in each category over the past five years.”

mix of funds and fees

is content editor for Morningstar Australia

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