To understand how much you are really paying in super fund fees, you have to demystify the myriad ways different funds describe their fees. The good news is that it is not as complex as it sounds.
By Alex Dunnin

KEY POINTS
The more fees you pay, the more your fund must earn to make up the fees. While there are many types of fees, you can group fees together to derive an overall fee measure. Paying higher fees doesn't buy you better returns, but it does buy you more flexibility. You can use the SelectingSuper fee calculator to derive your overall level of fees. This is your total expense ratio (TER).

Your aim in selecting a superannuation fund is to find one that will make you as wealthy as possible by the time you retire or leave the workforce, without exposing you to too much unnecessary investment risk. To do this, your super fund must earn consistently reasonable rates of investment returns - year in, year out.

Fees will affect your returns

To give you a better chance of building your retirement savings, it helps if your super fund only charges reasonable fees. Why? Because what you get in your pocket is what's left from the investment returns after all the fees are taken out; it is no more complicated than that. So the higher the fees, the higher the returns have to be to leave you with more money in your pocket.

An example will highlight why costs are such an important issue. If two 20-year-old investors achieve identical investment returns before any fees, but one pays only 1 per cent in fees each year while the other pays 2 per cent in fees each year, then our member in the higher fee fund will retire with 30 per cent less in their account. You think I'm making this up? I'm not. Have a look at the graph below.

So paying higher fees can cost you big money. And this means if you are paying higher fees you should make sure you use the fund shrewdly so that you more than make up the fees through better and wiser investment mixes. Above all, remember that your fees do not buy better returns but more flexible investment and insurance menus, so if you are going to pay higher fees to get this flexibility just make sure you use it as there is no point paying for something you don't use.

All about the fees When checking out a super fund's fees, there are five main types of super fund fees you should know about, as shown in the table at the end of this chapter. The different types of fees mean that the different people involved with your super fund are getting a different share of your fees. For example, in many super funds, the investment managers may only be receiving one-third of the fees you are paying, and this means there is no point for any of us to keep blaming them for all our fee problems because its just not their fault. In fact you will receive better value by screwing down a deal on your management fee than by screwing down a deal on the investment fee or the member fee. This is because a half-price discount on the biggest fee is always better than a half-price discount on the smallest fee. A fee people love to hate is the contribution fee. This fee, if you are paying it, usually goes to your financial adviser to cover the cost of talking to you and providing some basic financial advice. But you can often get discounts on this fee and, regardless, most companies do not pay contribution fees with their super any more. Even in personal funds these contribution fees are beginning to fade away. The trick is you should always remember to ask for a discount, as sometimes the financial adviser may be hoping you don't know about these deals. When a super fund or a financial adviser is willing to discount fees for you, this is sometimes called 'dialing down' your fees. Sure it's a silly term, but it means the fund and adviser are happy to be flexible, and this is actually a great sign. But if the fees dial down so much that the fund or adviser don't think they are being properly paid then don't expect too much service from them. It's yet again one of those balancing acts when choosing a super fund. When working out your total fees, don't forget to also count the member fee. If you are starting out in super, this member fee is your biggest headache, and funds that might at first seem expensive can sometimes actually be cheaper for you because they don't charge a member fee. For example, if you have only $1000 in your fund, a $52 per annum member fee is costing you 5.2 per cent of your account. This can be nearly three times the management and investment fees. Of course, the game quickly changes as your account balance grows.

Impact of Fees upon Your End Retirement Benefit   Decomposing Your Super Fund Fees

There are also some tricks of the trade you should watch for when it comes to fees and charges. For example, some funds claim to have low or even zero fees, even though they make this happen by deducting extra costs from their earnings rates before declaring your crediting rate. There is nothing sinister about this if the fund is open and honest about it, but if your fee deal is unbelievably low then check out why as the law says funds must disclose to you everything about how it covers its costs.

Watch out especially for funds that try to trick and confuse you by talking about fees charged to the fund and how they are different to fees charged directly to you. Anything that comes off the top of your return before you receive it is a fee to you - no ifs, no buts. Funds that do this aren't technically being dishonest, but they aren't helping you either. You should expect and demand that any super fund treat you with respect, and give honest and direct answers to your simple questions about how much they charge. (The new fee and cost disclosure guidelines force funds to be very clear about what they charge you.) Funds that don't act accordingly definitely do not deserve a single cent of your hardearned money.

SelectingSuper Fee Calculator

If you wish to compare super funds' fees, one method is to use the SelectingSuper fee calculator. The fee calculator converts all the fees you are paying into a single dollar amount. It then applies that amount to your overall account balance to come up with your total fee as a percentage of your account balance. We call this percentage your total expense ratio, or TER.

Knowing the different fees charged by different super funds means you can calculate the different TERs for a number of funds. You need to decide for yourself whether a fund offers any more value for money than the next. It is important to realise however that a TER does not indicate the future performance of a fund.
Some corporate master trusts can sharpen their fee deals for some companies so much that there may be hardly any difference between their fees and those of a low-cost industry fund. Most master trusts will negotiate on fees, and if you represent a company or you have a sizeable amount of super you should not be afraid to bargain hard for a deal. Reflecting this, simple comparisons of the fee rates don't always tell the whole story.

The SelectingSuper fee calculator reveals that the average super fund charges a TER of just over 2 per cent. This TER includes the impact of contribution, all management, member and investment fees. The biggest fee culprit is the management fee, and the fees with least impact are the member fee (once your account balance grows) and the contribution fees. If you want to receive a deal on your super fund fees, you will get the best results if you dial down the management fees. It is also good if you can dial down the contribution and member fees, but it's the management fees that have the biggest impact.

The result from all this fee analysis is that if your TER is around 1.0 per cent or less, you are getting a great fee deal. If you are paying around 2.0 per cent, your deal is okay but you should be receiving some financial advice and some good extra features with a reasonable dose of flexibility. And if you are paying more than 2.5 per cent, you are paying top dollar and you should be receiving fantastic financial advice, excellent service and the best of everything.

You can use these averages to your advantage too. For example, if your fund is charging more than 2.0 per cent and you still receive only limited advice and not much flexibility, then something is wrong and you should ask the fund why it charges premium prices for only discount-quality services.

Remember that fees don't buy returns, but they should buy flexibility and advice. Don't expect these from a low-cost fund, and unless you want them, don't use a super fund that bundles them in whether you use them or not.

	How to Calculate your TER
Step 1	What contribution fees are you paying? Multiply this percentage by your total contributions. Write this number down.
Step 2	What is the total of all the fees that apply to your account balance; for example, management fees and investment fees? Note that ongoing fees can be broken down into expense recovery fees, custodial fees, issuers fees, etc. Multiply this total percentage by your account balance. Write this number down.
Step 3	What flat dollar member fees are you paying? Write this number down.
Step 4	Add together the numbers you wrote down in steps 1, 2 and 3. Write this number down.
Step 5	Divide the number you calculated in step 4 by your account balance. Convert this number to a percentage by multiplying it by 100.
	Congratulations! You are now a super fund fee expert, as you have just calculated your total expense ratio. Well done.

Super Fund Fee Types

Description	Applies to?	Who gets it?	What's normal?	Can be negotiated
Contribution : How much it costs each time you contribute money into your super fund. Sometimes also called entry fees	Contributions	The adviser	Up to 5%	Usually
Management : How much it costs to stay in the fund. Sometimes also called plan management or administration fees	Account balance	The fund	Up to 2%	Usually
Member : How much you pay for account keeping and basic administration of your account	Flat dollar fee	The fund	Up to $80 pa	Usually
Investment : How much you have to pay your investment manager(s)	Account balance	The investment	Up to 1% pa	Not Usually
Termination : How much it costs to withdraw money from the fund or exit the fund. Sometimes also called exit fees	Account balance	The fund	Up to $100	Not Usually

Source: Rainmaker Information

What to expect from your fund

Your super fund must describe the fees it charges in an easy-to-read table in the key features statement in the product disclosure statement. This can usually be found towards the front of your membership booklet. Look for the section on fees and charges. If you don't have this booklet, call up your super fund and ask for a copy to be sent to you.

If your super fund doesn't have a section that describes all the fees, this may be a warning that you should use another fund. The Commonwealth Treasury and ASIC - the Australian Securities & Investments Commission - have devised a template for funds to follow. It is now compulsory for funds to use this template when describing their fees, so if a super fund you are thinking about using isn't following these fee disclosure guidelines then do not join the fund. Poor fee disclosure is always a very bad sign in a super fund.

Also remember that your fund's rate of return described in your member statement is the figure left after all the fees are taken out (or it should be). If your rate of return is low, it may be that you are paying too much in fees. Conversely, just because fees are high doesn't necessarily mean your rate of return after fees is low either.

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