- Superannuation has come a long way since the 90s in terms of fees, services and benefits.
- Traditional banks used to charge higher fees compared to industry super funds, but they are both comparable and competitive now.
- If you're happy with the fees and services, focus instead on extra contributions, your income, the investments within your super and a plan B.
If you have spoken to anyone about superannuation, the conversation would always, inevitably, turn to fees. Over the last twenty years, there has been a big focus on super fees and what is being charged in your super.
There has been a lot of good from this – fees have come down dramatically in the last 20 years. However, we are now at a point where we must change the discussion from fees (i.e. the costs) to benefits (i.e. returns and service).
I’m going to give you a “Horrible Histories” lesson on superannuation fees for you to understand the big picture. For those of you who were deprived as a child, Horrible Histories is a kids’ TV and book series about the important parts of our history, such as the Groovy Greeks, Rotten Romans, Vile Vikings and Awful Egyptians.
Unfortunately, there won’t be as many swords and dragons in this version of Horrible Histories. Regardless, we hope it gives you an understanding of the history of fees in super and why we don’t spend a lot of time focussing on fees anymore.
Around 1992, King Keating or Prime Minister Paul Keating, for those who are seeking a more serious rendition of history, noticed a problem. He noticed that there was not enough gold in the dungeons to pay all the people once they retire.
Therefore, he summoned his wise men and came up with a cunning plan. He ruled that the people should fund their retirement themselves, not the government. Therefore, he passed into law that every boss in their land should set aside up to 3% of the people’s pay for their retirement (9.5% in 2018). Since they thought it was a super plan, they named this retirement plan “super”.
The bosses soon asked King Keating, where should they put the money set aside for super? King Keating declared that the banks would do. Their job is to keep money and lending it to others to buy their houses, so they will know how to best look after the people.
The banks saw this as an opportunity to make more money, so their CEOs could build even bigger mansions. Therefore, the Bloody Banks charged very high fees to manage the people’s super, which enabled their CEOs to install pools and tennis courts for their expanding McMansions.
For every $100,000 the people held in super, the banks were making $3,000 to manage the people’s money. The people didn’t seem too concerned about this in 1992, where they were getting over 10% return after fees, kept in cash. However, while interest rates on cash continued to reduce over time, the bank fees were not reducing.
It was then that the people started to become angry. They wanted a better deal.
The people needed a hero…
Enter the Industry Super Funds. The Industry Super Funds were started by unions who, after telling the people how bad their bosses were, started to realise the banks were just as bad. They saw an opportunity to take money away from the banks and keep the money for the people.
They started telling the people that the banks were ripping them off. They told people they would manage their money for much less than what the Bloody Banks were charging because the CEOs of Industry Super Funds don’t need fancy cars and jet skis. They said for every $100,000 the people held in super, they would only charge $1,000.
The people liked this idea and started to take their money from the Bloody Banks to the Industry Super funds. Because of this, the Industry Super Fund made more money for the people than those who left their money in the banks.
And then suddenly…
The Global Financial Crisis (GFC) came along.
Most of the people lost money, and they were furious and demanded action. And the Bloody Banks did act, with a little convincing from the various Kings during that time.
They fired their CEOs who retreated to their McMansions (poor things!).
They reduced their fees to the same level as the Industry Super Funds.
And they became known as Beautiful Banks for the rest of their days (at least according to the banks).
Therefore, in 2012, the fees charged by industry funds and banks were effectively the same. And funnily enough, the returns are effectively the same.
The banks are happy (well, except for the former CEOs who had to sell their private jet planes). They still look after the people’s money and mortgages, and they can look after their super funds as well.
But the industry funds aren’t pleased. They kept telling the people that they should move their money to Industry Funds because they are cheaper.
There is just one problem – it isn’t true anymore.
The fact is there is very little difference in fees between banks and industry super funds nowadays. In fact, in a lot of cases, the banks are slightly cheaper than industry super funds. And because the fees are the same, the returns are similar as well.
Thus, if fees and returns are the same, what should we be focussing on?
One would argue service, and I do believe the banks have a significant advantage in this area. The banks have more branches, better technology and are more willing to work with financial planners than industry super funds.*
But I have never recommended moving your funds from an industry super fund to another fund based purely on service. That is bad advice.
The big question
Ultimately, there is only one question I would ask as to whether to keep or move your existing fund or not.
“Are you happy with your current super fund?”
If you are happy with the service and the fees are reasonable, between 0.6% and 1%, then keep it. If you are not happy, change it.
Don’t focus on the fees, because they are all very similar these days – please speak to a financial planner to confirm this.
Those who focus solely on fees are losing sight of the benefits.
Those who focus solely on fees never become wealthy. They are the ones who spend more time looking at the spots on the windscreen than the road.
- Focus on what you can control.
- Focus on your income and making more contributions to super.
- Focus on the Power of 30.
- Focus on the investments within your super.
- Focus on your Plan B.
And above all else, focus on getting the right people around you who can give you the best advice based on your circumstances.
And spend time watching Horrible Histories with your kids as well – it is highly likely to be more entertaining than what is on TV now.
* When I say more willing to work with financial planners, unfortunately, most, but not all, industry super funds only allow industry super fund financial planners to debit advice fees from super. As a result, we may not be able to fund your membership fees from your industry super fund. This, in my opinion, is completely ridiculous and anti-competitive. If you wish to fund your advice and membership fees from super, we may need to move your super to another industry super fund or bank fund that allows this. However, there are other factors to consider.
This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Master Your Money Now Pty Ltd (ABN 65 627 229 681) is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523
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