Super Fun: Getting the Most Out of Fees, Cash, Property

You can never have too much super and it follows that you can never have too much information about super. Olivia’s excellent podcast last week replying to reader’s questions dealt with a broad range of issues but there were a couple that posed very interesting ideas about the ways we use the superannuation environment. That got me thinking and writing this article.

While I don’t have definitive answers, I looked at three questions and all three questions had a common theme of getting the most out of the superannuation environment.

The first question was about the cost of having around $400,000-$500,000 in super invested in a balanced option. The questioner said that this figure is often said to be the amount needed to have a Self-Managed Super Fund (SMSF), but if you don’t want to have an SMSF, which super funds would be the best value for money to take care of your super?

I think this is a fascinating question – which is most suited, the SMSF or a more commercial or industry balanced fund? Comparing these two options for around $400,000 to $500,000 makes it an interesting case. 

First, Fees

Let’s start by looking at fees.

The first fees to look at are those that allow us access to the superannuation environment – the fees for an SMSF vs the fees for a commercial, government or industry super fund account.

The fees for SMSFs vary significantly, as does the level of service provided – and my experience suggests some providers who charge higher fees provide high quality advice and expertise, so higher fees may well be worthwhile. It is hard to find an “average” figure but some lower cost providers advertise fees in the ballpark of $1,500 per year.

Let’s compare this to the superannuation fund I use – Australian Super. The costs are $1 per week plus an asset-based fee with a $350 maximum. On a $400,000 balance, that comes to a total of $402.

However, there are also the investment fees on top of this.

In the Australian Super fund that I mentioned earlier, there are two balanced style investments. Their balanced fund has a maximum fee of 0.5 per cent, which comes to $2,000 on a $400,000 investment. They also offer an “index diversified” option, which has a maximum fee of 0.1 per cent, or $400 per year.

A total superannuation fee (investment and administration fee) for the balanced option would be around $2,400 and around $802 for the index diversified option.

Keep in mind that the investment options are where fees can add up. If you are paying 1.5 per cent per annum for an active superannuation balanced fund, that quickly becomes a fee of $6,000 per year on a $400,000 balance – it is worth reading the disclosure documents and understanding the fees.

There might also be investment fees in a self-managed super fund, for example if you hold some ETFs or managed funds within your SMSF.

There was a time when access to direct shares (owning individual shares like BHP, Commonwealth Bank and Wesfarmers directly) was a benefit of using a SMSF compared to the fewer investment options in industry, government or commercial funds. However, times are changing, and more and more funds offer members the ability to own direct shares as part of their fund. 

Australian Super offers a “members direct” option which allows access to direct shares for $180 per annum. For investors who want to hold some direct shares in their superannuation, this has been an exciting change to commercial/industry/government superannuation funds.

One of the key determinants for me in choosing a commercial fund over an SMSF is the record keeping and trustee responsibilities. If I had a SMSF, even thought I might have excellent professional support, I still take on the responsibility for the running of my fund, and the paperwork and decisions around the fund. My preference is for the simplicity of having a superannuation fund take that on for me and being a member of the fund.

So – back to the question – the best value for me would be a low cost fund, with a range of investment alternatives, including direct shares if you want that.

A Better Cash Rate

Let’s turn now to second question: Why do super funds not offer a better cash rate? Our subscriber queried why his current fund was paying 2.77 per cent in income mode and 2.33 per cent in accumulation mode, well short of current bank rates.

I currently have my own cash invested with an online bank and am receiving 5 per cent interest. After the very low interest rates of 2020 to 2022, it is almost a shock to receive some interest in the account every month. It will also be a shock to have to pay tax on that interest when I put together my tax return in a month or so.

One reason the cash rate might appear a little low is that if it shows a 12-month return on an account, the cash rate 12 months ago was considerably lower than it is now. It might also be that the returns are shown after the 15 per cent superannuation tax. The fees on cash in a superannuation option will also reduce returns (for example, the 0.09 per cent on the cash option for Australian Super).

Perhaps another part of the answer to comparatively lower cash rates in superannuation funds is the competitive environment, with online accounts and term deposits offering attractive alternatives. I mentioned the online account I use offering a 5 per cent interest rate, above the RBA’s cash rate.

I think that for people in retirement, it is well worth thinking about investing the cash part of the portfolio directly outside of superannuation. Because of tax-offsets and the tax-free threshold, it is possible to earn significant income in retirement before having to pay tax and having cash (or term-deposits) outside allows you the benefit of immediate access to these funds.

Too Much Property

Finally, a very topical question: Vanessa is five years out of retirement, in the default growth MySuper stream with Cbus. She wants to know if she should change streams, as she’s particularly concerned about exposure to property. Her stream has 12 per cent exposure to property.

The asset allocation decision is one of the most important decisions that we make as investors, and thinking about the asset allocation you are comfortable with is a crucial financial decision. I have gone to the Cbus website, and looked at their investment options.

(As an aside, and in line with what I wrote for the first question, Cbus also offers the ability to invest in direct shares – another example of the increasing flexibility in superannuation funds.)

Cbus also offer a number of DIY options – investments in single asset classes. The asset classes offered are property, overseas shares, Australian shares, fixed interest and cash. You can use these single asset class funds to ‘tilt’ your portfolio toward investments that you are more comfortable with.

So, for example, if you want less property in your overall portfolio you could make part of each future superannuation contribution to include your current growth MySuper option, plus some additional Australian and overseas shares – so the proportion of property is reduced in the portfolio, if that is your concern.

In my case, my investments outside of superannuation are overweight Australian shares. To balance this up I use a balanced fund within my superannuation as my core holding, with part of every contribution set up to include global shares as well – to tilt the overall portfolio to an asset allocation that I am more comfortable with (i.e. reasonable exposure to global shares).

Fees, investment options, choice within superannuation funds and getting a fair rate of return on our cash investments. These are all important superannuation questions as we plan the best path we can to be comfortable financially.

This article corrects the AustralianSuper Cash Option investment fee for 2022/23 to 0.09% rather than 0.9% as previously written.