Costs take toll – study
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Tuesday, 18 September, 2001 - 22:00
ONE of the frustrating aspects of superannuation is the difficulty we have working out the impact of the various fees and charges.
The menu of fees and charges differs markedly across alternative superannuation prov-iders, which include industry funds, master trusts and corporate funds. Consequently, making a like-for-like comparison is fraught with difficulty.
A study commissioned by the Australian Institute of Super-annuation Trustees has tackled this problem by converting all fees and charges, for a sample of industry funds and master trusts, to a single figure.
University of NSW economist Hazel Batemen calculated the ‘percentage reduction in retirement accumulation’, ie how much your final super payout is reduced by all of the fees and charges you have paid over the years.
The study concluded that “under reasonable assumptions” the fees and charges imposed by a typical industry fund would reduce the expected retirement accumulation by around 10 per cent.
For the typical master trust, the reduction could range from 10 per cent for the very large-scale plans to around 33 per cent for the small plans accessed by individuals or very small companies.
In other words, some individuals face the prospect of losing one third of their potential retirement benefit in fees and charges.
The study indicated that most people using master trusts would pay fees at the lower end of the scale. In particular, large companies are increasingly contracting out their superannuation to master trusts, with fees and charges individually negotiated. “In some circumstances, the overall impact would be comparable to that of an average industry fund”, the study found.
Ms Bateman assessed some alternative single measures but they all had major shortcomings.
The widely used Management Expense Ratio (MER) was dismissed as inadequate because it only accounts for investment-related expenses.
Other fees that need to be assessed include contribution charges, member fees, transfer and terminating fees, ongoing management charges, switch
ing charges, fund expenses and trustee and custodian fees.
Another option is to convert all of these fees to a single dollar amount. “This may appear simple to understand but provides no indication of the impact of fees and charges on the retirement accumulation. This would be particularly so in the event of a high cost, high return investment strategy”, the study says.
Other options are to convert fees to percentage of assets or percentage of contribution.
Percentage of assets could be misleading for many consumers.
“Few would realise that a 1 per cent asset charge over 40 years would reduce their retirement accumulation by over 20,” the study says.
“Percentage of contribution may be easier to understand but may appear too penal: for example, a 22 per cent contributions charge may sound greater than a 1 per cent assets charge, although aggregate charges over 40 years would be equivalent.”
The study also noted that the impact of different charges depends on the length of time that members are in a fund.
Contribution charges are front loaded, which means they have a bigger impact in the earlier years of membership – and they have a bigger impact of individuals who are members for shorter periods of time.
In contrast, asset charges are back loaded, which means the impact on member balances is greater in the later years when their account balance has increased in size.
The menu of fees and charges differs markedly across alternative superannuation prov-iders, which include industry funds, master trusts and corporate funds. Consequently, making a like-for-like comparison is fraught with difficulty.
A study commissioned by the Australian Institute of Super-annuation Trustees has tackled this problem by converting all fees and charges, for a sample of industry funds and master trusts, to a single figure.
University of NSW economist Hazel Batemen calculated the ‘percentage reduction in retirement accumulation’, ie how much your final super payout is reduced by all of the fees and charges you have paid over the years.
The study concluded that “under reasonable assumptions” the fees and charges imposed by a typical industry fund would reduce the expected retirement accumulation by around 10 per cent.
For the typical master trust, the reduction could range from 10 per cent for the very large-scale plans to around 33 per cent for the small plans accessed by individuals or very small companies.
In other words, some individuals face the prospect of losing one third of their potential retirement benefit in fees and charges.
The study indicated that most people using master trusts would pay fees at the lower end of the scale. In particular, large companies are increasingly contracting out their superannuation to master trusts, with fees and charges individually negotiated. “In some circumstances, the overall impact would be comparable to that of an average industry fund”, the study found.
Ms Bateman assessed some alternative single measures but they all had major shortcomings.
The widely used Management Expense Ratio (MER) was dismissed as inadequate because it only accounts for investment-related expenses.
Other fees that need to be assessed include contribution charges, member fees, transfer and terminating fees, ongoing management charges, switch
ing charges, fund expenses and trustee and custodian fees.
Another option is to convert all of these fees to a single dollar amount. “This may appear simple to understand but provides no indication of the impact of fees and charges on the retirement accumulation. This would be particularly so in the event of a high cost, high return investment strategy”, the study says.
Other options are to convert fees to percentage of assets or percentage of contribution.
Percentage of assets could be misleading for many consumers.
“Few would realise that a 1 per cent asset charge over 40 years would reduce their retirement accumulation by over 20,” the study says.
“Percentage of contribution may be easier to understand but may appear too penal: for example, a 22 per cent contributions charge may sound greater than a 1 per cent assets charge, although aggregate charges over 40 years would be equivalent.”
The study also noted that the impact of different charges depends on the length of time that members are in a fund.
Contribution charges are front loaded, which means they have a bigger impact in the earlier years of membership – and they have a bigger impact of individuals who are members for shorter periods of time.
In contrast, asset charges are back loaded, which means the impact on member balances is greater in the later years when their account balance has increased in size.