Who really benefits from superannuation?
Years from now, the government will benefit from paying less in pensions.
Individuals are supposed to benefit from lower tax rates and financial security in retirement.
And the country as a whole should benefit from increased productivity.
But perhaps the biggest winners of all, are the financial advisors and institutions who stand behind the far-too-often convoluted, conflicted and obfuscated products that are part-and-parcel of the super system.
The writing has been on the wall for some time.
A 2014 Grattan Institute report into the super system found, "Australians pay far too much for superannuation."
At the time, it was estimated Australians pay $20 billion in fees and expenses. You'd think for the bureaucratic nonsense, paying higher fees for superannuation would be worthwhile to make outsized returns, but that'd be wrong. Indeed, after fees, Grattan found that the funds with the highest fees make the lowest returns.
Then there's the expenses. Australian funds were found to charge three times the OECD average, yet many OECD countries have superannuation systems larger than ours.
The bottom line is, "These payments to the superannuation industry can and should be reduced by at least half, saving Australians at least $10 billion a year," Jim Minifie, Director of the Grattan Institute Productivity Growth Program, wrote at the time.
All up, excessive fees and expenses can result in 20% less in the average retirement nest egg for everyday Australians. For a 50-year-old, that meant $80,000 in fees alone. For a 30-year-old, that figure was a more alarming $250,000.
Aussie, Aussie, Aussie…
Now, I'm all for paying up for quality advice from investment advisers, accountants and the like. However, when I heard that a recent report commissioned by Industry Super Australia, and undertaken by Rainmaker, found that Australians paid $30 billion in superannuation fees in 2014-2015, I was gobsmacked.
A total of 44% of fees eventually found its way back to the big banks and AMP Limited (ASX: AMP). Excluding AMP, a whopping $10 billion went to Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC).
My problem isn't that the banks make money.
The problem is: At best, they're overpriced; at worst, they're both overpriced and conflicted.
According to Fairfax Press, the Rainmakers report found not-for-profits control 41% of all funds in super, but draw just 25% of the total fees. Retail funds, like those operated by the banks, take 50% of fees, but hold just 30% of funds.
Self-Managed Superannuation Funds (SMSFs) pay 25% in fees, with a total of 29% of funds under management.
Moreover, in the 2014-2015 financial year, superannuation research by Chant West found not-for-profit funds returned an average of 10.2%. Retail funds returned 9.6% on average.
Foolish takeaway
The superannuation system is supposedly set up to help us, but the cost of red tape in this country is absolutely ridiculous. In my opinion, it's constructed in a way that makes it daunting for the lay person to understand and undertake successfully – which benefits the far-too-often conflicted financial advisers and institutions.
SMSFs are the only viable alternative to not-for-profit funds, in my opinion. However, setting up – and operating – an SMSF requires a fairly large sum of money to be viable and a willingness to learn topics in finance and business.
Nevertheless, last week, I showed how simple it could be to make truly life-changing amounts of money from a small initial investment, and the right temperament.
