Australians pay too much in retirement fees

Tuesday, October 20th, 2009

Australians have a compulsory retirement savings system but they are paying too much in fees for it according to independent think tank, The Australia Institute (AI).
In a discussion paper, the AI says fees and commissions on pensions, known as superannuation in Australia, cost the country more than $A14 billion a year, or half the cost of the age pension paid by the government.

It says some workers lose up to a quarter of their retirement savings in excessive fees.
Low-paid workers in particular suffer from fee erosion and a low-cost passive management fund could slash administrative fees by half or more, increasing final payouts considerably.

The AI advocates establishing a low cost default fund for workers who are not covered adequately or for any worker who wants to join it.  In its research paper “The case for a universal default superannuation fund” it says some people could be up to $100,000 better off in retirement.

 “There has never been a proper debate in this country about the issue of superannuation fees and how to minimize them. This paper is designed to help open up that debate,” said research fellow Dr David Ingles who co-authored the report with Josh Fear.

Australians save for their retirement through a range of industry, employer-based or private pension funds and most will have a choice of investment style in their fund.  Although funds offer a range of low risk to high growth investment options, about 80 per cent of people opt for the balanced option giving them a mix of investments.  If they do not make a choice, they usually are placed in this option by default.

Dr Ingles said many did not realize how much of their money was eaten away by fees.
“Administrative costs of 1.35 per cent can reduce final super fund balances by up to 27
per cent, or over $130,000 for a worker on the average wage. By contrast, a low-cost
passive management fund could slash administrative fees by half or more, increasing final payouts considerably,” he said.

People who switch jobs such as casual and contract workers often end up in three or four different funds and lose money by fee erosion or lose track of their contributions and Dr Ingles said a single default fund could take care of them.  Australia, with a population of 22 million, has 6.4 million “lost” superannuation accounts and nine million inactive ones.

The paper also proposes that superannuation funds who want to charge fees of more than one per cent be required to seek permission to do so from each member affected.
“This would ensure that high fees are being charged only with the informed consent of fund members,” said Mr Fear.

The AI said that higher fees did not mean a better fund performance and passive investors were likely to do better over their lifetime than active ones.  Fees range from an average of 0.7 per cent per annum for not-for-profit public sector funds to 2.12 per cent on for-profit retail funds.


Tags: australia , retirement , retirement fees

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