The majority of us will first be introduced to super when we get our first new job and the only thing we will most likely remember is filling in the form that is provided by the new boss. But if you want to be a little more proactive, there are a few things you can consider.
High fees will eat away at your savings so it pays to be aware of what those charges are. Basically, super funds charge five major fees on your superannuation:
- Membership Fee: Super funds charge a membership fee i.e. a fee for you to be a member with them. This is usually a weekly fee and it varies from $1 to $5 per week.
- Administration Fee: These are also known as Management fees. This fee is charged by super funds for looking after or managing your super account e.g. issuing statements etc.. Mostly these have a tiered fee structure i.e. based on your super balance you will be charged a certain % on your balance. The higher your super balance, the lower % of fee applies although the total dollar cost will be more as your balance grows.
- Management Expense Ratio (MER)/Investment Cost: MER is the fee charged by your Fund Manager for managing your investment. This fee is based on your choice of investment. The fee is usually charged as a percentage of your super balance.
- Performance Fee: This is the fee charged by fund managers for being able to exceed the target performance for the year. Most of the funds will provide an estimate for the coming year rather than the exact fee. This is because fund performance is not known until the end of the year and the performance fee is based on whether or not the fund manager outperforms the market. Some of the funds include this in their MER while others show it separately in their PDS.
- Contribution Fee: Usually charged while making contributions to your super account, with this fee payable to your financial adviser for his recommendations. Usually this fee is negotiable with your adviser and it varies from zero to 5%. This means that for every $100 paid into your account, the account may be credited with only $95.
Other superannuation fees
Apart from the fees mentioned above, other fees applicable are establishment fee, termination fee and other transaction fees like switching or withdrawal fees etc.
The basic rule that all super investors should work with is simple – the lower the fees, the higher the amount available for investment which, in turn, increases your super balance at retirement.
A high fee, however, does not guarantee a product with all the bells and whistles, and also not necessarily true the other way. Getting yourself the right product for your future needs is the key.
Superannuation case study
Peter and Jayson are average 25-year-olds in jobs that pay $50,000 annually. Both believe they will retire at 67 and have chosen a balanced investment option with their fund. For the purpose of this calculation, the annual return on Peter and Jayson’s super funds is consistently 9% before fees and tax.
Peter invests in ABC super fund, which charges a membership fee of $52 per annum and has a management expense ratio (MER) of 0.75%.Peter’s super balance at the time of retirement would be $416,000 in today’s dollar terms.
Jayson invests in XYZ super fund, which charges the same membership fee of $52 per annum but has a MER of 1.75%. This means his super balance at the time of retirement is $333,000 in today’s dollar terms.
That’s $83,000 Jayson misses out on down the track simply because his fund charges a higher fee than Peter’s.