IN NEARLY all facets of our daily lives, we know how much we are paying for the things we consume. Everything has a price and we can easily decide if we are willing to pay the price for the particular item.
Not so with Superannuation. To have someone manage your Super you never quite know what you are paying because the fee is based on a percentage scale of your investment balance which is constantly changing.
There are two things wrong with percentage fees. Firstly we never really know what a percentage fee is really costing us and secondly the cost is automatically indexed as our investment grows. So every time the market goes up and every time you make a contribution to your Fund, your fee goes up.
Consider this. Your employer must contribute 9% of your salary into your Superfund each year by law. Assuming you have $200,000 invested in Super, your Super Balance will grow in value by around $20,000 per annum assuming an 8% pa rate of return. That is your Super Balance is growing at 10% per annum. That 10% pa growth in your investment balance results in a corresponding 10% pa growth in your annual fee. The fee increase is charged each year and every year - automatically.
So whether you are in a higher fee paying Retail Fund or a supposedly Low Fee Index Fund, your fees are forever increasing. At first glance a fee of 1% per annum or 2% per annum seems reasonable. In any event every Fund charges this amount, so it must be reasonable. Not so when you start to think about it. Next time you see an advertisement from a Superfund Provider claiming that they "only" charge 1% per annum (for example Virgin Super advertises that they charge a low annual fee of 1% of your total account balance), consider that this generous low fee is costing you $2,000 per annum growing at 10% every single year on a $200,000 Super Balance.
The above is actually the best case scenario for Investors. For those of us who have our Super invested in Retail Funds the numbers get far worse. Retail Funds charge an average fee of 2% pa. On a $200,000 Super Balance this equates to an annual fee of $4,000 per annum, growing at 10% every single year. The rort escalates.
The only reason this rort has been allowed to go on for so long, is that the fee is usually taken out of our earnings and the net amount is credited to our account. So you never actually "pay it" and therefore never notice what you are actually paying.
Consider this. If the same Retail Superfund (assuming a Super Balance of $200,000) sent you an invoice every single month for $330 and increased it by 10% per year every single year (without ever notifying you or justifying why), would you pay it? Probably not. At the very least you would certainly start asking questions especially once you realised that your Superfund had simply invested in the top 50 or 100 stocks on an Index.
So what is the alternative? The obvious alternative is a fixed fee. A fee where you know in advance what you are paying and a fee that does not change regardless of how well your Super performs and grows. The only Superfund option we know of that offer this alternative is a Self Managed Superfund.