The banking royal commission finished its interrogation of the superannuation industry this week with the reputation of institutions such as Commonwealth Bank and AMP taking yet another battering.
What did we learn? The main takeaway is that millions of Australians are being ripped off by their super funds with exorbitant fees and charges.
Australian workers collectively pay more than $30bn a year in super fees, excluding insurance premiums, and it’s having a substantial impact on their retirement savings.
Consider this: a small increase in annual fees of just 0.5% can cost a typical full-time worker about 12% of their balance – roughly $100,000 – by the time they reach retirement.
Do you know what fees you’re being charged every month? If you don’t, you’re not alone. It’s time to figure out what’s happening with your super, and whether you need to switch your fund.
1. Check your account
You need to know how many super accounts you have.
If you have more than one, you’ll be paying multiple sets of investment fees, administration fees, and insurance premiums, and they will be eroding your super savings significantly.
You can check how many super accounts you have on the MyGov website. If you haven’t registered with MyGov yet, the process takes two minutes.
2. Consolidate your accounts
If you have more than one account, you should consolidate your accounts into one.
This simple step will add an extra $51,000 to the retirement balance of a typical worker in Australia.
You can consolidate your accounts into one of your existing funds or you can choose a new fund (but beware, some funds will want to charge you an exit fee for leaving them).
Xavier O’Halloran of the consumer group Choice said this was the single best thing to do immediately to improve your super situation.
“The first step we try to help people with is to identify if they have multiple super accounts, and consolidating them,” he said. “It’s really easy, because you can consolidate through the MyGov portal without any paperwork.”
3. Choose the best fund
This is one of the most fraught parts of the superannuation system. Basic information about fees and returns can be difficult to locate, often deliberately so.
It makes it extremely difficult to compare multiple funds thoroughly.
The royal commission publicly disgraced the big banks and financial institutions – including AMP, Commonwealth Bank, NAB, ANZ, and Westpac – for taking advantage of the system’s opacity to charge excessive fees and trail commissions, and charge customers for services that were never provided.
The commission also revealed that profit-driven “retail” super funds, which are linked to the major banks, have been involved in repeated scandals involving billions of dollars, and there are more examples of questionable behaviour from these types of funds than from not-for-profit “industry” super funds, which are linked to unions.
Naturally, the commission heard there was huge demand from the public for low-fee, simple to understand, no-frills super accounts.
The chief executive of Hostplus, David Elia, told the commission that its funds under management had surged $2.5bn over the past two years because fans of the popular book The Barefoot Investor, had taken author Scott Pape’s advice and invested in the Hostplus Indexed balanced fund, because it has a tiny management fee of 0.06% and a simple but effective investment strategy.
Hostplus has been the best performing fund in the country for the last two years, delivering a rate of return of 13.2% for the year ending 30 June, 2017, and 12.5% for the year ending 30 June, 2018.
The royal commission has also referred to work done by the Productivity Commission this year, which showed the best-performing funds in Australia were more likely to be run by industry super funds than retail funds.
So one thing is clear from the commission: industry super funds are, on the whole, a safer and smarter option for your retirement savings than retail super funds.
4. Check your fees
Unfortunately, this can also be difficult.
To check your fees, every fund must provide a product disclosure statement that discloses the fees you’re being charged.
You’ll likely be charged an “administration fee” (typically a fixed dollar amount), and an “investment fee” (typically a percentage amount, which means you’ll have to do some maths to figure out how much you’ll be paying each year).
The other big cost will be for the life insurance linked to your super account. The “insurance fee” will either be disclosed in the product disclosure statement or a separate insurance guide.
