Stockspot’s Fat Cat Funds Report 2018 has once again found that fees make all the difference when it comes to your retirement savings. If your super funds charges you high fees, chances are you could be $250,000 worse off when you retire.
The Fat Cat Funds report looks at the performance of Australia’s largest superannuation funds. It names the funds that take advantage of Australians unwittingly paying away their retirement funds in superannuation fees.
- Super fund ratings: the usual suspects
- Super fund comparison: high fees vs low fees
- Why don’t super funds index?
- How to find the best super fund for me
- Keep the Fat Cats away from your super
Our aim is to help Australians understand the factors that matter most when they choose a super fund.
Now in its sixth year, in 2018 we compared the largest 500 multi-asset super fund options to assess how they performed after fees.
This year we have rated funds based on how they have performed after fees over five years compared to funds in the same risk category. Based on this we have singled out two groups of funds which we believe warrant extra attention:
If you’ve followed our Fat Cat Funds report in previous years it will come as little surprise that:
High super fees eat into your superannuation.
The usual suspects are again at the top of the list.
Super fund ratings: the usual suspects
ANZ/OnePath topped our list (yet again) with the most Fat Cat Funds. They controlled a quarter (25%) of the worst 40 funds. For six years we have pressured ANZ to respond by reducing the fees in these funds or move clients to better performing options. Instead we have observed that many of their poor performing funds have increased (not shrunk) in size.
A quarter (25%) of the worst 40 funds were owned by ANZ.
This speaks to the complexity of superannuation and absence of healthy competition; which drives the inertia of the general public who suffer most. It also highlights the conflicts of interest that are rampant in the Australian superannuation system.
Super fund comparison: high fees vs low fees
Our research shows there is a clear correlation between high fees and long-term underperformance in super. Fat Cat Funds generally have higher fees than Fit Cat Funds.
Poor fund performances comes predominantly from active management fees as well as higher administration and operating expenses than necessary.
The impact of high fees becomes more apparent with each passing year as funds find it more and more difficult to generate sufficient returns to make up for the drag of higher fees.
High fees impacts people of all ages. However, the burden is most apparent for those who have more years of work ahead of them. We find that a person in their 20s or 30s paying 1.5% per year or more in super fund fees are likely to lose over $200,000 in their lifetime due to unnecessarily high fees – that’s the equivalent of 10 around the world trips!
Why don’t super funds index?
This year we decided to look more closely at actual superannuation fund performance and compare it with an index fund of equivalent risk (after fees and taxes).
Up to $17.4 billion in fees last year could have been saved if super managers decided to use low cost indexing as their default option.
Only 13% of the 500 funds analysed performed better than a low-cost index fund over five years with similar fees and taxes. The comparison for balanced funds is even worse. Only 1 in 20 (4%) balanced super funds could beat an equivalent index fund.
The report shows that superannuation managers can easily access index funds, yet many choose not to because of the conflicts of interest in the industry.
Consultants to superannuation funds want to earn recurring fees. They have a vested interest to appear to be ‘active’ in making adjustments to their recommendations from year to year. Almost invariably, assuming funds have the right long-term asset allocation in place, the best course of action is no action – to do nothing and to leave their fund as-is.
People in default super funds would benefit greatly if all money simply went into a low-cost index fund.
How to find the best super fund for me
Our six years comparing super fund performance and fees suggests that you should focus on just two simple factors when selecting a super fund for the best chance of success:
Step 1: Find a fund with the right amount of risk for your age
A successful superannuation strategy starts with a mix of investments that’s suitable for your investment horizon and retirement goals.
The balance between risk and return 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 the amount of risk you can take.
Step 2: Choose the fund with the lowest fees
Fees are the other most important factor when choosing a superannuation fund. You can’t control how markets perform, but you can control how much you pay for the management of your money.
The smaller that fee, the greater your share of the investment’s returns. Our research shows that lower-cost super funds tend to outperform higher-cost alternatives across all categories. Our research over the last six years shows funds that charge less than 0.75% p.a. perform better in the long-term.
Keep the Fat Cats away from your super
Too many Australians are unaware of the devastating impact high fees have on their long term retirement savings.
The Royal Commission into Banking Conduct and the Productivity Commission has surfaced some of the reasons people end up in poor performing funds.
Many relate to issues that arise when stakeholders including financial advisers, trustees, executive teams, fund managers and consultants have incentives that are not aligned with the people they represent – the fund members.
With well over $20 billion spent on superannuation fees every year, it is a well paid gravy train for many who work in the superannuation industry.
We hope that the recommendations that come from the Royal Commission and Productivity Commission lead to changes to the superannuation system which results in:
more transparency; and
lower fees for Australians.
We welcome all feedback on the report and hope you find it helpful for understanding what matters most when selecting a super fund.
Grow your savings the smart way
Stockspot is Australia’s largest and most experienced online investment adviser. We make investing easy and affordable. Whether you’re growing your wealth, saving for a home, a family or retirement, we help you do it with the right investment portfolio and guidance.
- How super funds play the ratings game (Part 1)
- What are the best industry super funds?
- Where Are the Customers’ Yachts? The problem with wealth management in Australia
- The Paradox of Skill: Why active funds disappoint every year