MAKE SENSE OF THE FEES YOUR FUND IS CHARGING YOU

To understand how much you are really paying in superannuation fees, you have to demystify the myriad of ways different products and funds describe their fees. The good news is that it is not as complex as it sounds.

Key points

	The more fees you pay, the higher your investment returns must be to make up for them.
	While there are many types of fees, you can group them together to derive your overall Total Expense Ratio.
	Paying higher fees does not get you better investment returns, but it can buy you more investment and insurance choices.
	Paying higher fees doesn't buy you better returns, but it does buy you more flexibility.
	You can use the SelectingSuper fee calculator on the website to derive your overall level of fees. This is your Total Expense Ratio (TER).

Your aim in selecting a MySuper product or 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 along the way. To do this, your super fund must earn consistently strong rates of investment returns - year in, year out.

Fees affect your investment returns

To give you a better chance of building your retirement savings, it helps if your MySuper product or 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 this is so important to understand. If two 20-yearold investors achieve identical investment returns but one pays only 1% in fees each year while the other pays 2% in fees each year, then the member in the higher fee fund will retire with 20% less in their account. This impact is shown in the graphs later in this article.

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 for these fees through better investment mixes and higher investment returns.

CONSUMER WARNING Do not chase high returns by paying high fees because there is no evidence that paying higher fees buys better investment returns. Instead, the research evidence shows that paying higher fees usually gets you more investment choices and more insurance choices.

All about the fees

When checking out superannuation fees, there are five main types you should know about, as shown in detail in the table at the end of this article. These are:

• Contribution fees, also known as entry fees, are paid to financial advisers when you join the superannuation fund.
• Administration fees are paid to your superannuation fund to cover their administration, platform, compliance, technology and marketing costs.
• Investment fees are paid to your fund's investment managers and asset consultants. These fees are sometimes now called the Indirect Cost Ratio.
• Member fees are also paid to your super fund usually to cover account keeping.
• Termination fees, also known as exit fees, are to cover the cost of partial withdrawals or fully leaving the fund.

These fee types mean that the different people involved with your super 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 blaming them for your high fees because they are rarely what's causing the problem. Some funds may also bundle their management and investment fees into a larger combined figure meaning that if your fund reports a zero investment fee it doesn't mean it is investing your superannuation for free, it instead means it has structured its arrangements differently to other funds.

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. You can often get discounts on this fee if you ask for it or if you are contributing a large amount of money into your superannuation fund. As a result of this, members in not-for-profit funds do not normally pay contribution fees leaving these fees as a problem more for members in retail superannuation funds especially if they are in personal retail funds.

When a super fund or a financial adviser is willing to discount fees for you, this is sometimes called 'dialing down' your fees. 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 $1.50 per week member fee is costing you $78 per year which converts to 7.8% of your account which is likely to be five times the combined management and investment fees. Of course, these ratios change quickly as your account balance grows.

There are also some tricks of the trade you should watch for when it comes to fees and charges. For example, some products or 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 everything to you about how it covers its costs.

INDIRECT COST RATIO: Some super funds no longer declare investment fees instead referring to their Indirect Cost Ratio (ICR). They use this term because these charges may not be paid  directly by the fund but indirectly by members. For example, the investment manager deducts their share of the ICR fee from the gross investment return they achieve  before declaring their net investment return that they pass onto the fund. In cases where an administration fee is bundled with investment fee the ICR may replace both of these. When you see an ICR just think of it as a fee that applies to your account balance.

Watch out especially for funds that try to 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 being transparent with 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. Funds that don't or won't definitely do not deserve a single cent of your hard-earned money.

SelectingSuper Fee Calculator

If you wish to compare super funds' fees you should use the SelectingSuper fee calculator.

About You Account Balance $ Annual Salary $ Superannuation Contribution % Expected Rate of Return %   About Your Fees Contribution Fees % Management Costs - Ongoing % Management Costs - Member $ Management Costs - Investment % Management Costs - Indirect %

How does it work and how do you use it? Click to find out

To calculate your fund's TER follow this example Step 1 What is your administration fee?       0.50%      Step 2 What is your investment fee?       0.00%        Or, what is your investment's Indirect Cost Ratio?       0.65%        What performance fee did you pay?       0.10%      Step 3 What is your member fee per year (e.g., $1.50 per week x 52 = $78)?  $78   Divide this figure by $50,000 0.00156   Multiply your answer by 100       0.16%      Step 4 Add the percentages together, this is your Total Expense Ratio      1.41%    Congratulations! You have just calculated your Total Expense Ratio.   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 products and super funds means you can calculate the different TERs. It is important to realise, however, that a TER does not indicate the future performance of a fund - but we do know that higher fees rarely lead to better investment returns. Proving this, many of Australia's top performing MySuper products and super funds usually have low fees anyway, so why pay higher fees if you don't have to? SelectingSuper's TER calculator demonstrates that the biggest fee culprit is the management fee because it is usually the highest while the fees with least impact are the member fee (once your account balance grows) because the $1.50 per week converts to only 0.16% on a $50,000 account balance. Contribution fees while they sound nasty, because they apply to contributions not the account balance, are actually not a major problem unless you pay them when you make a big initial deposit such as transferring in a retirement lump sum. As a result of this, 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, of course, good if you can dial down the contribution and member fees, but it's the management fees that you should worry about first. While the average superannuation member across Australia pays a TER of just 1.2% this covers everybody whether they are in SMSFs, government schemes, not-for-profit and retail funds. A better comparison used by SelectingSuper is that if you are in an industry or retail fund and paying less than 1% you are in a very sharply priced fund while if you are paying between 1% and 1.5% you are paying a reasonable price. If, however, you are paying above say 2% then you are in an expensive fund and you should be getting something very special e.g., you are receiving top quality financial advice, you are getting a great range of extra features and lots of investment and insurance choices - and these features are translating into the highest investment returns. Some workplace retail funds like corporate master trusts meanwhile can sharpen their fee deals for some client companies so much that there may be hardly any difference between their fees and those of a low-cost industry fund. This is because most corporate master trusts will negotiate on fees, and if you represent a company or you have a sizeable amount of superannuation in your company account you should never be afraid to bargain hard for a better deal. Reflecting this, simple comparisons of the fee rates don't always tell the whole story. You can use these averages to look at your superannuation fund the other way around. For example, if your fund is charging more than 2% and you still receive only limited financial advice support and not much investment flexibility, then something is  wrong and you should ask the fund why it charges premium prices for only discount-quality services.

What to expect from your super fund

Your super product or fund must describe the fees it charges within an easy-to-read table in the Key Features Statement in the Product Disclosure Statement (PDS). 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, check out your superannuation fund's website or call up your super fund and ask for a copy to be sent to you.

If your super fund doesn't have a section in its PDS or website that describes all the fees, this is a red flag warning that you should use another fund. The Commonwealth Treasury and the Australian Securities and Investments Commission have devised a template for funds to follow. It is 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 this fund. Poor fee disclosure is 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 investment return after fees is low either.

Super fund fee types
Description	Applies to?	Who gets it?	What's normal?	Negotiable?
CONTRIBUTION How much it costs each time you contribute money into your super fund. Sometimes also called entry fees.	Contributions	The adviser	0 to 5%	Yes
ADMINISTRATION How much it costs to stay in the fund. Sometimes also called plan management or administration fees.	Account balance	The fund, but sometimes shared with the adviser	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 $80pa	Usually
INVESTMENT How much you have to pay your investment manager(s). Some funds now refer to this as the 'indirect cost ratio'.	Account balance	The investment manager	Up to 1%pa	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	Usually