Independent think-tank the Grattan Institute has released a detailed report titled Super sting: how to stop Australians paying too much for superannuation. The report suggests that "Australians are paying up to three times more than they should for superannuation."
According to the report, the average fee paid on account balances is 1.2%, which is more than 300% higher than the median rate of OECD countries!
The scary fact for retirees is the massive long-term disadvantage which these higher fees can have on retirement balances. For a 30-year-old, by the time he or she retires, their total retirement balance will be about $250,000 lower than a fellow OECD retiree according to the report's findings. Meanwhile for a 50-year-old worker, by the time he or she retires those higher fees will have reduced their super balance by around $80,000.
The fee gouging does not appear to have been reduced by competition, with the Grattan Institute stating that choice has not driven account holders to select low-priced funds despite evidence that after-fee returns from low fee funds are superior to higher return-higher fee funds.
The report goes on to suggest two main reforms which could improve the outcome for retirees. Firstly, the establishment of a tender system to identify a best-priced default fund. Secondly, a tax return process which would alert taxpayers to their lowest-fee option.
The Grattan Institute's findings have the potential to benefit the largest fund managers in Australia, possibly at the expense of the boutique, higher priced funds. Fund managers such as AMP Limited (ASX: AMP), BT Investment Management Ltd (ASX: BTT) and IOOF Holdings Limited (ASX: IFL) would all appear to be well placed to offer low fee options and win a tender process.
Foolish takeaway
There is still a long way to go before the majority of Australians are well informed about their options when it comes to maximising their superannuation balances for a comfortable retirement. For workers who are prepared to manage their own investments, many have chosen to set up self-managed super funds. The ability to minimise costs and also invest directly in equities has obvious appeal for many Australians planning for their retirement.
