Australia’s $4.5 trillion super system is increasingly competing on a single number. The fee.
Over a decade of analysing super funds through our annual Fat Cat Funds research, one conclusion has remained remarkably consistent. Lower fee funds tend to deliver better long term outcomes.
That pattern has held across bull markets and downturns alike. High fees steadily erode returns. Lower fees leave more money compounding for members. APRA’s annual performance test has reinforced the same message. Higher cost products are more likely to underperform, and more likely to fail.
But a new problem is emerging.
In the race to advertise the lowest fee, some costs are becoming less visible rather than genuinely lower. The published fee is not always the true cost.
Consider tax within pooled structures
Most large super funds operate as pooled trusts. Members’ money is combined and invested together. When members switch options or withdraw, assets inside the pool may need to be sold. That can trigger capital gains tax within the fund.
Long term members can effectively pay tax triggered by others leaving.
Over decades, that tax drag can materially reduce net returns. Yet it doesn’t appear as a line item in the fee table.
The same issue can apply to franking credits. Fully franked dividends carry valuable tax credits in a 15% super environment. In pooled structures, those credits are typically received at the option level and allocated across members. In other platform structures, credits are allocated directly to the member whose holdings generated them.
That difference can have a significant impact on after tax outcomes. Yet it rarely appears in cost comparisons.
Consider synthetic exposure
Some super options marketed as low cost index strategies use derivative contracts known as swaps rather than holding the underlying assets directly. On paper, the management fee can look extremely low.
But swap structures can embed financing spreads and counterparty margins within the contract. These costs are not always separately itemised in a way that allows meaningful comparison with traditional index management fees. There is also counterparty risk, as the fund relies on an investment bank to deliver the index return.
The fee looks low but the economic cost may be much higher.
Benchmark disclosure is another blind spot
Many options are labelled Indexed Australian shares or Indexed international shares.
But not all indices are the same.
Different benchmarks have different construction rules, sector weights and ethical overlays. Some funds clearly disclose the exact index they track. Others provide limited detail.
For example, one large fund’s Australian shares indexed option tracks the MSCI Australia 300 Index but applies a lower weighted carbon intensity overlay. Members selecting what appears to be a plain vanilla index option may be unaware they are taking a carbon tilt.
Without clear benchmark disclosure, it becomes difficult to verify performance or properly assess value for money.
Finally, consider the treatment of tax deductions on expenses
Super funds in the accumulation phase generally pay 15% tax on earnings. Administration and investment expenses are usually tax deductible, creating a 15% tax saving at the fund level. The key question is whether that saving is clearly credited back to members.
Two funds can quote similar headline fees. Yet one may pass back the tax benefit more transparently than the other.
The impact of hidden costs in superannuation
None of these practices are inherently wrong. But taken together, they expose a weakness in how super costs are presented.
When members focus solely on the published fee, they may overlook structural costs that are less visible but equally important. A hidden drag of 0.5% or 1% a year may seem minor. But over a working lifetime, it can compound into tens of thousands of dollars.
In super, small annual differences are magnified by time. The damage accumulates quietly for decades, and by the time it is visible there is little opportunity to repair it.
Funds face intense pressure to advertise the lowest possible fee. That competitive focus risks shifting attention from genuine cost reduction to presentation.
If lower fees improve outcomes, and the evidence consistently shows they do, then transparency about total economic cost must improve as well.
Policy makers should consider clearer and more standardised disclosure of structural and embedded costs that materially affect net returns. That includes reporting realised capital gains tax within pooled options, clearer disclosure of synthetic exposure and financing spreads, explicit identification of benchmark overlays and transparent treatment of tax deductions on expenses.
The number that matters most for members is not the fee on a website. It’s their balance at retirement.
If hidden structural costs can erode retirement balances by 0.5% or 1% a year, disclosure rules have not kept pace with the scale of the system.
This article is adapted from an opinion piece originally published by The Australian – “The race for lower super fees is masking the real cost to retirement savings“ (11 March 2026).
