$18 billion in fees paid to super funds

Superannuation funds have reaped in a record $18.6 billion in fees over the past year, with the average Australian paying $2,300 in super fees.

No wonder the self-managed super fund (SMSF) sector is surging.

According to a report by super fund researcher Rainmaker, cost estimates in the compulsory super system equate to 1.23% of super funds under management, equating to $18.6 billion a year. Super funds had a ‘super’ year in 2013, with the average balanced fund returning 15.6%, and the $1.6 trillion sector is expected to grow as the compulsory super guarantee rises to 12% over time.

Rainmaker director of research has told Fairfax Media that members are paying maximum fees at retirement, when their balances are the highest they will ever be, which is why so many are tempted to jump ship and run their own super fund.

Evidence of that was in Rainmaker’s finding that SMSF’s are the cheapest fund to run. It seems the days of the high fee retail super funds could be numbered, with a growing trend of balances moving to lower fee, not for profit industry funds and SMSFs.

According to research by the SMSF Professionals Association and Macquarie, the total number of SMSFs rose 7.3% to 503,320 at the end of March 2013, with close to one million members. The research also noted that one in twelve Australians say they plan to open a SMSF in the next three years. Should that happen, the number of SMSFs is set to more than double.

Wealth management companies running retail super funds such as Colonial, AMP Limited (ASX:AMP), MLC and BT Investment Management (ASX:BTT) will need to either lower their fees or change their fee model in order to survive.

Foolish takeaway

Big banks’ earnings could also be at risk of falling, with Commonwealth Bank (ASX:CBA) owning Colonial, while MLC is the wealth management division of National Australia Bank (ASX:NAB).

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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