The great Australian super scam

Unnecessary super fees cheat Aussies out of billions of dollars every year, robbing them of the retirement they deserve.

Every dollar spent on unnecessary or inflated superannuation fees is money misdirected from funding a better retirement lifestyle for hard-working Australians. Unfortunately, super isn't sexy so people aren't paying attention. But neglecting this is a mistake individuals, and the country at large, will regret. Making small changes today will create a far brighter future for everyone.

Australians pay more than $30 billion a year in super fees. Everything has a cost, but many of these fees are unnecessary or inflated. That's due to a lethal combination of structural issues, consumer apathy, commercial avarice and an unhelpful focus on the importance of performance and insurance in super. Here we examine three key factors which lead to Aussies paying more than they should for their super.

Multiple Accounts = Unnecessary Fees

One-third of all super fund accounts (about 10 million) are unintentional multiple accounts where people don't realise they have more than one account (or don't do anything about it). Yet every super fund charges a range of fees (fixed and variable, for management and embedded insurance) which means individuals are paying fees on each of their accounts, all of which do basically the same thing.

It's like owning one mobile phone, but having plans with Telstra, Optus and Vodafone - you pay three times for no extra benefit! Nobody would do that, yet few people think twice about having multiple super accounts. It's the same thing.

-There has been a significant amount of marketing from the government, financial institutions, the super industry and super funds about the need to consolidate. But most people are so focused on their life today that they don't prioritise planning for their future. Let's face it, worrying about your future, wrinkly old self when you are busy worrying about paying your bills today is tough. But it's apathy people will regret at leisure in retirement.

Focus on Performance = Unnecessary Fees

Almost five million super accounts are in high-fee funds which together cost $1.3bn a year more than low-fee funds. Most of these fees are predicated on the promise of better performance. Yet the Productivity Commission has found that super funds with higher fees have tended to deliver lower investment returns. So performance is not a viable argument for charging higher fees.

This is consistent with research conducted by Revolver Capital (more on this in a paper to be published soon), ASIC and independent research body, the Grattan Institute, which indicates that low fees are a better guide to future returns than past returns. While this may seem counter-intuitive and there certainly is some complexity behind this, when boiled down the reason is actually quite simple:

Investment performance is transient, whereas costs are persistent.

Performance is unpredictable as it relies on the ability of fund managers to add value. Despite all the marketing hype, there is little (if any) evidence that managers are able to do so with any consistency. That, combined with the inevitability of market cycles which impact the performance of every investment asset class at some time and over time, suggests a passive investment approach will likely yield better results. This is particularly relevant when investing the money Aussie's are saving in their super accounts as these are long term investments.

Paying higher fees for fund managers to chase performance is a strategy unlikely to pay off. Better to pay less in fees today, leaving a larger account balance to attract the benefits of compounding interest over time. Given super funds with higher fees have tended to deliver lower investment returns, as per the Productivity Commission's report, there is a balanced argument that you may well experience better performance over time with lower cost funds. We don't believe in chasing performance when making decisions about where to place your super, however these trends lend weight to the argument in favour of low cost funds.

Embedded Insurance = Unnecessary Fees

Many Aussies don't realise they are paying for insurance products in their super. Given the general lack of engagement with super, despite it being one of the largest financial assets most people have, this isn't surprising. However, this is another source of unnecessary fees eroding super account balances.

Of the 24.5 million Australians, half have life, total and permanent disability or income pro-tection insurance through their super. Of that group of 12 million people, around a quarter don't know that they have insurance in their super. As a result, they may be paying for insurance products independently and through super, which is an unnecessary and costly double up. Furthermore, if they are one of the large group of people with multiple super accounts, it is likely they are paying for duplicate insurance policies across multiple super accounts. In fact, around 20% of super account holders have duplicate insurance policies.

You wouldn't take out two insurance policies on your car. Ignoring duplicate insurance policies is the same - more cost for no value.

To make matters worse, there are many instances where embedded insurance products are either irrelevant, charging premiums which are not relevant to the account holder's personal circumstances, and/or have onerous conditions which can result in members finding themselves ineligible to claim on the policies. A common example of this is where a woman's employer stops making regular super payments because she is on maternity leave, however the insurance in her super account becomes invalid if she misses just three payments. Given the large disparity in super balances between women and men, which is in some part due to constraints imposed by motherhood, this adds insult to injury and must be addressed. That's a story for another day.

Small changes today can have a significant impact on the future. Individuals don't need to wait for the financial services industry to sort things out. These three simple changes can be made, with confidence and ease, today.

Despite the negativity which surrounds the industry at times, there is great value in engaging a financial adviser when making decisions about your super and insurance. If you don't have an adviser, you can go to the Adviser Ratings website for help. www.adviserratings.com.au

01/ Consolidate multiple super accounts.

Consolidating your super into one account makes it easier to manage and you will pay less in fees, leaving more in your account.-

Almost half of Australians aged 40 to 45 have two or more super -accounts. For this group alone, the result is that $2.6bn a year is being paid in unnecessary fees. That is money which, if it remained in their super accounts, would be growing into a more significant savings balance to fund a better retirement.

02/ Choose a lower cost fund.

Switching or consolidating into a lower cost fund will deliver more certain benefits over time than chasing performance.

Today the lowest-cost funds are charging annual fees of about 0.5 per cent of super fund balances. If all super funds charged fees at this level, even with their super in a poor-performing fund, a typical full-time worker would retire with approximately $100,000 more. Imagine what a difference that would make to the lifestyle of the average Aussie in retirement.

03 / Cancel duplicate, unnecessary or inappropriate insurance policies.

Insurance is important, but only if the product delivers the right features and benefits for the individual, at the right cost.

Avoiding multiple insurance policies paid through super could boost retirement balances by more than $50,000. It is also more likely that people will make claims on insurance policies they know they have, and which are best-suited to their individual circumstances.

Australians work hard and we're living longer, with greater demands for a lifestyle of our own choosing. It's time to get serious about creating greater retirement wealth for every generation. The current government and industry focus on cleaning up the sector is a great start. But the real power lies with individual Australians who can take charge, beat back the unnecessary fees and make sure more of their hard earned money is actually being saved for retirement.