Seven ways your super could suffer
- Paying for advice you didn't get
- Big fees
- Paying commissions
- Multiple accounts
- Insurance you don't need
- Poor performance
- Getting robbed blind
1. Paying for advice you didn't get
This became a recurring theme once the banking royal commission began probing the murky depths of superannuation.
It turns out a number of super funds were charging fees for financial advice that more than a few account holders weren't getting.
Not that it would have done much good anyway. The undelivered advice was often "general advice", not "personal advice" – the kind that actually takes people's individual circumstances into account.
Some of the gory details included:
- MLC/NAB Masterkey products charging a 0.44% p.a. fee for access to general advice whether you accessed it or not (and it didn't help that the fees were actually a commission that MLC/NAB managed to manoeuvre around the commission ban).
Reader Stephen B tells us he paid about $20,000 for advice he never received from two super funds (Colonial First State and MLC).
Stephen is now officially involved with his super. He shared his story with the banking royal commission and has a complaint on file with the Superannuation Complaints Tribunal seeking compensation.
"I never wanted a financial adviser but was advised that the funds would not sell me any products without one," Stephen says. "I never received or wanted financial advice. The financial adviser did not sell me the product, but after I decided what products I wanted to purchase, the financial adviser simply facilitated their purchase for me."
"I have in writing from the financial adviser that they provided no financial advice, that I would not give them information that would enable them to do so and they even wanted me to sign an indemnity regarding the purchase of one product as they did not recommend the product to me."
It's hardly a new story. Even before the royal commission kicked off ASIC issued an update in August about compensation schemes for undelivered advice from a number of financial institutions.
The total expected to be paid back to customers who were meant to receive personal advice from the eight institutions named (AMP, ANZ, CBA, NAB, Westpac, Bendigo, StatePlus and Yellow Brick Road) is around $261 million (with CBA topping the list at $143 million, followed by ANZ at $59 million).
Add in $103 million charged for general advice by Nulis (part of NAB) that was never received and there's a whopping $364 million owed to customers on the fee-for-no-service front.
Advice isn't included in all super accounts and never in default MySuper accounts, but in accounts where it is included it's unlikely to be of much benefit during the accumulation phase.
How to take charge:
- Contact your super fund and ask for an annual advice review.
- If you've been paying for advice but not receiving it, file a complaint with your super fund and ask for compensation.
- You can an opt out of ongoing financial advice at any time – a good move if it's not really improving your financial circumstances.
2. Big fees
Aside from performance (which varies widely from fund to fund), account management fees can really stunt the earning power of your account if not kill it altogether.
These fees are higher in Australia than in many other OECD countries, and they also vary widely from fund to fund.
The way they're reported also varies widely from fund to fund, making comparing fee structures between funds confusing at best and impossible at worst.
At the moment Australians pay a combined $30 billion a year in superannuation fees (excluding insurance premiums), and a fee increase of a mere 0.5 percent will cost the average full-time employee about 12% of their balance, or $100,000, by the time they retire. So fees are a big deal.
- Retail funds charge higher fees on average than nonprofit industry funds.
- High-fee funds deliver lower returns.
- About 14% of the 28.6 million super accounts out there are high-fee accounts charging more than5% of the balance (0.68% is about average).
How to take charge:
- Contact your super fund and demand a clear explanation of the fee structure in your account, and consider switching accounts if the fees are on the high end (taking any exit fees into account). See our guide to superannuation for how to find the best fund.
3. Charging commissions – yes, they still exist
While the Future of Financial Advice reforms outlawed commissions across many segments of the financial services sector, some commission structures that were in place before the reforms came in are still in effect, or "grandfathered".
About two percent of super accounts (or 636,000) still have grandfathered adviser commissions attached, costing the affected members about $214 million a year.
How to take charge:
- Check your online super account statement to see if adviser commissions are being deducted.
- If so, talk to your super fund about ending these fees. You may have to switch to a new fund.
4. Multiple accounts
Ok, this one's on you, not the banks.
It's easier than ever to combine multiple super accounts into a single account and stop paying fees (and probably insurance premiums too) on more than one account.
But that doesn't mean people are consolidating as much as they should.
- About one-third of super accounts (roughly ten million) are "unintended multiples", which occur when you accept a default account offered by a new employer without closing an existing account or transferring the funds.
- Multiple accounts cost their holders a combined $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees.
- These multiple account fees cost the average full-time employee about six percent (or $51,000) of their super balance by the time they retire.
How to take charge:
- Combine your super accounts into a single account – the one with the lowest fees and best returns over at least five years. See our guide to superannuation for how to pick a good fund.
5. Insurance you don't need – or know you have
Around 12 million of us have insurance (life, total and permanent disability and/or income protection cover) through our super accounts, but about three million of us don't know it.
We paid a combined $9 billion in insurance premiums in 2016–17, about 35% more than in 2014–15.
Insurance in super isn't necessarily a bad thing because the cover is generally more affordable than outside super. But whether you need it or not – and how much you need – depends on your situation.
If you're just starting out in the workforce and don't have a family or dependents to worry about, for instance, life insurance is probably not necessary.
- Around 17% of super members have insurance policies in more than one account, which can erode the average super balance by up to $50,000 by retirement.
- Some super fund members have insurance cover they won't be able to claim on – income protection insurance is the prime example of these kinds of 'zombie policies' (you can only claim on income protection if you're working and only on one policy, despite the premiums you've been paying).
How to take charge:
- Check to see what kind of insurance you have in your super.
- If you don't need it, tell your fund to discontinue it. But be careful: insurance within super can be a pretty good deal in some cases, so be sure you really don't need it before pulling the plug. (If you go to take out life insurance later in life, any pre-existing conditions will be taken into account, and you may end up paying more, having exclusions applied or be refused cover altogether.)
6. Poor performance
About two-thirds of us have our retirement money parked in default funds (aka MySuper products) – the ones we end up in when we let our employer choose the fund for us.
Many of these funds are delivering reasonably good returns (about 5.7% on average) by super standards. But many are not.
Overall, nonprofit (industry) funds have consistently outperformed for-profit (retail) funds, though not in every instance.
A recent Productivity Commission project found that somewhere around 1.7 million MySuper (aka default) member accounts comprising about $62 billion in assets were underperformers from 2008 to 2017, suggesting that "many members are currently being defaulted into underperforming products and could be doing better".
Being in one of these funds can really be costly. How costly?
- About 1.7 million MySuper accounts have been undermined by what the Productivity Commission calls "serial underperformance".
- A typical full-time worker entering the workforce today would have a balance 36% lower (or $375,000 less) by the time they retire than a worker in a fund making average returns.
- If you're working for a small business and haven't chosen your own super fund, chances are greater that you'll end up in an underperforming fund.
- At the moment, there's no process in place to get rid of underperforming funds.
How to take charge:
- Check your fund's annual report and see how its returns stack up against the 5.7% benchmark.
- Look for long-term performance of around five years at minimum – not just one comparatively good or bad year.
- There are a number of services that rate super fund performance: Canstar, ChantWest, Morningstar, RateCity, SelectingSuper and SuperSavvy, for example. Since they all use slightly different methodologies, take the figures as indicative – and be sure they include fees.
- If your fund consistently comes up as a low performer over the long term, it's time to switch funds.
7. Getting robbed blind
Employers are legally obligated to pay a 9.5% portion of your pay package to your superannuation account, but that doesn't mean they all abide by the law. Cases of unpaid super are many, and getting your money back can be difficult – especially if the business doesn't exist anymore and the money is basically gone.
No one's really sure how much super has gone unpaid. The Productivity Commission put the estimate at $2.8 billion a year in April 2018.
And in a 2017 statement drawing on data from the 2013–14 financial year, the industry fund peak body Industry Super Australia estimated that about one-third of Australian employees are missing out on some or all of their super payments.
According to Industry Super Australia, 2.76 million people were underpaid by an average of $2025 each in 2013–14
How to take charge:
- Log in regularly to your super fund's website and check your account to make sure the money is going in.
- If it's not, approach your employer and ask for an explanation, bearing in mind that paying super is a legal obligation.
- The ATO provides tools to help you estimate your unpaid super and report unpaid super.
What the royal commission showed us
Everybody knows the Australian superannuation system is the greatest gift a nation ever gave to a financial services sector.
Thanks to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (aka the banking royal commission), we now also know that we can't really trust the people looking after that system.
Super is the stuff of fantasy for money managers: a huge pot of money, disengaged clients, opaque fee structures, and little if any accountability for performance.
The 9.5% of your salary package that goes to super added up to a collective $2.7 trillion as of June 2018.
That's a lot of money for super fund managers to make hay with.
Not everyone has been poorly served by their super fund, but the many examples of foul play in the superannuation sector that came to light at the banking royal commission in August served as a reminder that blind trust is a bad idea, especially if your money is in a retail super fund owned by a bank (industry super funds fared much better at the royal commission).
Enough consumers have been wronged that the lawyers are circling: the law firm Slater and Gordon announced in September that it was lining up a class action against Commonwealth Bank-owned Colonial First State and AMP super funds (for starters) on the grounds that they stuck members in high-fee, low- return accounts and owe upwards of $1 billion in compensation.
What to do if you're seeking compensation for bank misconduct
The super funds don't make keeping them honest easy: a CHOICE research project in 2016 found that lack of clear and reliable information is a major impediment to people getting involved in the management of their super.
It also doesn't help that there were 202 major funds to choose from as of June 2018 (not including self-managed super funds).