The great fee boom
28 April 2014
The case for doing your own super has been strengthened with the release of a report by the the Grattan Institutue showing that Australians are paying around 50 per cent – or $10 billion – more than they should in fees.
The AFR reports that over the life of an average worker those excess costs will eat into their savings and leave them with 20 per cent less retirement income. It is a transfer that will have a contradictory effect. Super is supposed to take the pressure off pensions, but Grattan Institute economist Jim Minifie says more people will be forced on to the pension:.
“People aren’t paying attention” to how expensive their funds are, he said.
The report finds that unlike other systems around the world, Australian fees have stayed high even though the industry has expanded rapidly.
The report, The $10 Billion Super Sting, warns that despite the fact the system has tripled in size to $1.7 trillion over the past decade, fees have hardly budged, contrary to what would be expected in any industry with such a surge in scale.
Average fees have slipped down only slightly to 1.23 per cent in 2013 from 1.38 per cent in 2002, mostly because more expensive retail funds have lost market share to self-managed funds.
“At that pace it will be 50 years before Australia attains even the median expenses achieved today by funded pension systems in the OECD,” Mr Minifie said."
The key problem here is that managers of super are paid on the basis of the size of the assets under management. Not on the basis of the service they provide. It is an old trick, and it is creating great rewards for the super funds that have been able to achieve the necessary scale.
The obvious solution is to pay managers a flat fee on the service they provide. Of course that would be greeted with great resistance. But it would make more sense.
The other option is to do it yourself provided the fund is of sufficient size. There are costs: accounting and auditing, but there are also potentially great gains. Even if a DIY super trustee hires an advisor, the fee will be a flat fee, not a percentage of assets under management.
The cost of having fees based on assets under management is large. The report estimates that a sixfold increase in average fund sizes over the past 10 years should have lowered costs by over 20 per cent, or almost $2 billion.
Super savers are paying for large marketing and advertising budgets:
"Mr Minifie said public apathy allowed leading fund managers to differentiate themselves by offering an ever widening range of products and services, while boosting marketing efforts to expand market share.
“All of these drive up costs and fees,” he said. “Competition on these features, rather than on fees, does not remove other inefficiencies, such as excess pay, manual processes or overly active management of funds that reduce net returns.”
The report says superannuation is the biggest opportunity for micro-economic reform in the economy and argues policy makers should adopt two changes it says would drive down fees.
The first would be to copy countries such as Chile, which has a regular competition among funds to become the state-approved cut-priced default fund.
Workers who don’t allocate their own funds, or choose to remain passive investors, would have their payments directed into this fund, which would be subject to fresh competition every few years.
Since the introduction in 2010 of tendering in Chile, where fees are almost one-fifth of what they are in Australia, costs for new default account holders have fallen 65 per cent, according to the report.
The second reform proposal to fuel the drive for lower fees would be to make it easier for account holders to compare their fees to those of the tender winner.
This would involve the tax office hosting a super choice platform that taxpayers visit when they submit their tax returns, the report suggests.
Mr Minifie warned recent reforms such as “MySuper” would do little to reduce upward pressure on fees as it did nothing to address marketing, sales or asset management costs. He said a simpler, lower cost system would expand the economy by “freeing up workers, managers and capital goods to produce more value elsewhere.”
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