It’s the dirty not-so-hidden secret that the superannuation industry does its best to conceal -- for-profit super funds are a complete rip-off.
It’s the dirty not-so-hidden secret that the superannuation industry does its best to conceal -- that for-profit super funds are a complete rip off. A survey by SuperRatings revealed yesterday that the ten best performing superannuation funds were all industry or corporate funds -- retail or ‘for profit’ super funds provided far poorer returns.
Such a conclusion is not especially surprising -- retail funds (many of which are owned by the large banks) exist to make a profit -- they do so by charging higher fees to members. The retail funds however do not possess any sort of expertise which allows them to provide superior returns to investors and therefore, the result is lower returns.
The retail fund industry comically attempted to explain the difference in returns, with Fairfax’s Clancy Yeates reporting
that “for-profit fund managers say these league tables fail to take into account the different levels of risk offered by retail funds.” Exactly what additional risk is being borne by those investing via industry funds remains to be seen, as in most cases, the investment allocation (and risk weightings) are actually selected by the member.
Further, many of the actual investments are the same for the retail and industry sector – the differences largely rest in the fees charged by for-profit super funds. (A valid comparison can be drawn to child care -- with private ‘for profit’ companies, like ABC Learning Centers competing with not-form-profit organisations doing effectively the same thing).
In fact, few business sectors have it quite as good as the ‘for profit’ wealth management and superannuation firms. While the poor market performance dented returns and led to capital outflows last year, not many industries can boast statutory guaranteed revenue.
As Peter Martin noted
in the Fairfax business papers today, “the super industry, more than any other, has lived off government largesse. What other industry gets customers herded to its doors by compulsion and who are compelled to hand it a fresh 9 per cent of their income each year, regardless of performance? What other industry enjoys the benefit of tax breaks that keep pushing extra voluntary dollars its way and away from competitors?”
Not only does the superannuation industry thrive courtesy of legislative force compelling workers to direct almost one-tenth of their earnings to a fee-grabbing monolith, but the performance of many of the actively managed funds (which superannuation companies utilise) leaves much to be desired.
There is of course a third option -- that is, managing one’s own nest egg by way of a Self Managed Super Fund. While managing ones own retirement monies is fraught with danger (as well as administrative difficulties), in terms of return, it is difficult to defend the notion that one is better simply investing their savings themselves in passive funds (in equities and other asset classes) rather than handing money to an active manager.
2010 investing guide noted the statistic that 63 percent of large-cap fund US managers under-perform the market -- as do 87 percent of US-based foreign stock pickers. (Similarly, the godfather of investing, Warren Buffett, noted in 2007 that “the best way in my view is to just buy a low-cost index fund and keep buying it regularly over time…if you have 2% a year of your funds being eaten up by fees you're going to have a hard time matching an index fund in my view.”)
Sadly, utilising a SMSF is not practical (or even sensible) for many Australians – left with little choice but to place their savings with the country’s fee gouging and under-performing wealth managers.