A recent research report shows that most super fund members think that fees are a more important consideration than performance when comparing funds1. Interestingly, this changes as members get older with members over 55 ranking performance as a more important factor.
Wes Hatch, AustralianSuper Senior Product Design Manager, explains his take on these findings: “While fees are an important part of the performance equation, there is a bigger picture to consider.”
“Some funds might have lower fees, but they might not perform very well. Likewise, going with a fund that charges high fees doesn’t mean you’ll get the best performance.”
There are lots of funds out there advertising low fees, but how do you know what you’re really getting for your money?
As the title of this article suggests, it’s the net benefit that counts.
What is Net Benefit?
‘Net benefit’ is one way to measure the real value being generated by the fund. It’s basically investment earnings (based on historical returns) after any fees and taxes have been calculated and taken out.
As the net benefit has all the fees and taxes taken out, it gives an indication of the real value a super fund is adding to member’s retirement savings. After all, the higher the net benefit, the higher the value of a member’s super investment.
It also allows members to compare funds assuming the same starting balance and annual income.*
This graph shows how much better off a member in AustralianSuper’s Balanced option (the default) would be after 10 years compared to a member in the average fund, with various assumptions on the member’s starting super balance and annual income.* As you can see the AustralianSuper member has a final balance of $154,853 compared to the member in the average fund who has $140,415. The difference between the two balances of $14,438 can be attributed to AustralianSuper’s earnings being $9,459 higher, and fees being $4,979 lower than the average fund.
This is food for thought next time the conversation in your tea room or around the water cooler turns to super. The bottom line is it’s always the net benefit that counts.
Comparing apples with apples
There are a number of factors which contribute to the fees a fund charges, and its long-term net returns. Two of the most important are the investment mix (what the fund invests in) and the investment approach (how it invests).
“Some asset classes cost more to invest in than others. For example, infrastructure and property cost more than cash. But there are good reasons for this – they give you the potential to earn higher long-term returns, and you also gain diversification benefits.” adds Hatch.
AustralianSuper aims to keep costs as low as possible, given the aim of extracting the best possible performance outcomes for members. This means investing in a broad range of quality assets across shares, property, infrastructure, private equity, bonds and cash. We also take an active approach to managing assets, and use our scale to lower costs and structure investments in the most effective and efficient way.
Active management means we aim to outperform our competitors at the total portfolio level, and also aim to outperform the market return for each asset class. This is a different approach to an index fund, which typically charges lower fees but aims to match the market return.
“We’ve been doing a lot of work behind the scenes to improve net benefit outcomes for our members. One of the most significant, is our internal management program, which is helping to lower costs and improve the net returns. In 2016/17, internal management added an extra $100 million for members through good performance, cost savings and doing things more efficiently.”
The Balanced option returned 13.59% against the median option’s return of 10.72% for the year, and 11.11% against the median option’s return of 9.66% for the five years to 31 December 2017.†
The Balanced option for retirement income accounts returned 14.88% for the year, and 12.36% for the five years to 31 December 2017.‡
It’s important to remember that these returns are after taxes, administration and investment fees and costs. So, while fees are important, they’re only half of the story. It’s the net return you get to keep that makes the biggest difference to your retirement outcome.
 Influences when making superannuation choices, September 2017 – Industry Super Australia/UMR Strategic Research
*Comparisons modelled by SuperRatings, commissioned by AustralianSuper. Modelled outcome shows 10 year net benefit of the main balanced options of AustralianSuper and competitor funds tracked by SuperRatings, with a 10 year performance history, taking into account historical earnings and fees – excluding contribution, entry, exit and additional advisor fees – of main balanced options. Modelling as at 30 June 2018. Assumptions include: $50,000 starting account balance, $50,000 annual salary, contributions at Superannuation Guarantee rates, amounts expressed in today’s dollars.
† SuperRatings Fund Crediting Rate Survey – SR50 Balanced Index, December 2018
‡SuperRatings Pension Fund Crediting Rate Survey – SRP 50 Balanced Index, December 2018
Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.