Retail funds not so super
Updated
A new study shows that retail funds have an average return about 2 per cent lower than industry funds (Flickr: Alex Proimos)
It is often said 'you get what you pay for', but that may not be the case with superannuation.
A new report says that when it comes to super, the more you pay, the less you get.
And tens of billions of dollars are being milked from workers' retirement savings to pay for financial advice most people do not get.
People look for the best value at the best price and competition is meant to make the consumer king.
But the chief executive of the Industry Super Network, David Whiteley, says when it comes to superannuation it seems it does not work that way.
"For every 1 per cent extra paid in fees to a super fund, members are receiving one-and-a-half per cent less in returns," he said.
The Industry Super Network represents the not-for-profit industry super funds and it is releasing a new report today called Supernomics.
It says the choice in super laws, introduced five years ago, have failed in their promise to reform through competition.
"The economics of super don't work in the way we typically expect competition to work," he said.
"I'll give you an example. If one of the major banks had a home loan rate of 2 per cent more than any other home loan rate, nobody would get a home loan from that particular bank. Within the super system it doesn't work that way."
The report cites data from the Australian Prudential Regulation Authority and independent agencies that rate super funds.
It shows that retail funds run for profit deliver on average 2 per cent a year less than industry funds.
Yet despite choice in super laws, few people leave funds that underperform.
David Whiteley says it is a classic case of market failure.
"[There are] three causes of market failure within the super system," he said.
"The first is there is incredible member disengagement and inertia. That means that people are not taking any or particular active interest in their superannuation.
"The second problem is that there is considerable complexity within super and most Australians have got a very low level of financial literacy.
"The third problem is that when people do seek financial advice they see a financial planner who typically in addition to providing advice sells them a product. Often that product, a retail fund, is an underperforming and expensive fund."
And the report says millions of workers are charged in their super fees for financial advice that they do not receive.
"We estimate that well over 4 million people are paying for financial advice that they don't receive," he said.
"For an average income earner they could spend up to one year's wages in fees and commissions for financial advice that they don't receive."
And, according to Supernomics, the money leached out in fees will cost the economy $120 billion in lost retirement savings over the next decade.
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