Super Fee Drop

By Nick Bruining

Administration fees on existing superannuation funds have tumbled with the new superannuation choice regime tipped to be the catalyst for further savings in the months to come. In a study released last week, major players are starting to drop fees in a move designed to attract fund members who will be able to choose where compulsory superannuation payments end up.

The Association of Superannuation Funds of Australia says Superannuation Choice is likely to affect up to 70% of Australia’s 654,000 employees with contributions topping $57 Billion alone last year, adding to a pool of funds which is now close to $1 Trillion.

According to the KPMG study into Employer Superannuation Funds, marketing of Employer funds has been traditionally targeted at employers rather than employees. This is because in many cases, employers determine which superannuation fund is used without input from employees. Features such as administrative simplicity, price, member reporting and investment and insurance options for members have been significant factors in determining which fund an employer selects.

Greater awareness of fees and charges by members of superannuation funds and an ability to jump from one scheme to the next has meant that the focus is shifting towards members in a bid to attract and retain members.

The report’s author, Senior Manager of Superannuation Services of KPMG Wayne Hirt, says that the long term viability of a superannuation fund will be determined by its size.

“The not-for-profit sector is more reliant on increasing their membership levels in order to keep their fees low because they work on flat dollar fees. The more members they have, the greater the economies of scale.” Says Wayne Hirt

Not for profit schemes include many of the Industry based schemes such as Westscheme, JUST, HESTA, ARF and REST. These funds traditionally charge a flat dollar amount per week with fees between $1.00 - $2.00. Additional funds management fees can be difficult to quantify but are sometimes less than 1% per annum.

“In contrast, the retail sector generally charges members on a percentage of their account balance, therefore the addition of new members does not necessarily result in a reduction in fees charged. Retail funds instead will be looking to increase their funds under management to retain profitability,” said Mr Hirt.

Fees on these schemes often range from 1.0% up to 2.5% and in some cases, an entry of up to 5% on each contribution could be charged.

“We don’t usually see the full entry fee charged these days and indeed, many employer schemes have reduced the entry feeds to nil. Similarly, this study looks at the administration fee alone for the actual administration platform. Some funds may actually embed other fees within the investment charges which are listed separately and at this stage, these don’t necessarily need to be disclosed. Members therefore need to see the total costs before changing funds” he said

Nonetheless, the “Low fee” marketing message being delivered by the industry funds seems to be paying off with a greater inflow of funds to these schemes over the last financial year.

Industry funds reported a 33.3% increase in funds under management which is almost double the 17% reported by the traditional corporate funds.

“Importantly, it seems as though the competitive pressures through choice will see the fund member better off overall. I expect that over the next couple of years, we’ll see the fees fall further, superannuation products simplified and probably a reduction in the investment choices within the funds. This is because generally speaking, the more choices you have, the greater the cost” Says Wayne Hirt.