A study of major super fund fees has revealed a shift in the relative costs of different market segments.
The latest Chant West fees report looks at trends over the past three years across master trusts (both retail and corporate versions), industry funds and public sector funds.
The key findings of the report are (for the full report, click on "View as PDF" above):
- Public sector funds charge the lowest fees, due largely to the relatively small number of employers they service, their lower promotional costs and the fact that most contributions are submitted electronically. They also tend to have a higher level of indexed management.
- For retail investors (individuals who are not part of a company plan), master trusts are more expensive than not-for-profit industry and public sector funds. For a relatively small account balance of $25,000, for example, the average master trust fees are double those of the average industry fund and nearly three times those of the average public sector fund.
- In the corporate super market, the gap between master trusts and not-for profit funds is much smaller, but still significant.
- Industry fund fees have shown a clear upward trend over the past three years, while those of retail master trusts and public sector funds have been relatively stable.
- Across all fund categories there is inconsistency in the disclosure of investment performance fees.
- There is almost universal non-disclosure of the full costs of fund-of-funds type investments (typically private equity, infrastructure and hedge funds), meaning that the true costs of many funds are understated.
The cost hierarchy
The graph below shows the average management costs for the major funds in each segment for account balances of $25,000, $50,000 and $300,000. The fees for retail master trusts exclude in-built adviser commissions and the corporate master trust fees are based on company plans with assets of $10 million.
Chant says: “The hierarchy of costs is quite clear, with master trusts more expensive than industry and public sector funds. But the gap between corporate master trusts and not-for-profit funds is much smaller. That’s mainly due to scale and because corporates often have consultants or advisers to help them negotiate on fees.
The study identifies a variety of factors that have had an effect on fees in recent years, either positive or negative.
“The biggest driver has been choice of fund, which came into operation in July 2005,” Chant says. “That changed the landscape completely, because it meant most funds had to start competing for members. Fees are an obvious point of comparison, so it became important to have a competitive offering in terms of fees.
“In some cases that has led to fee reductions. Some master trusts, for example, have reduced their margins, especially in the corporate market. However that has been offset to a large degree by an increase in compliance costs and in investment fees. Many master trusts have increased their exposure to alternative assets, which typically have higher fees than traditional asset classes. Also, performance fees have had an impact in recent years.
“So master trust fees have remained relatively stable overall, with efficiency gains and margin reductions being offset by increases in compliance and investment costs.
“With industry funds, on the other hand, we have seen their fees increase steadily over the past three years. Like master trusts, they have incurred higher investment fees and compliance costs. They have also been faced with higher administration costs, due largely to increased member activity.
“Competition has meant that many industry funds have had to increase their marketing budgets, too, in order to raise their brand awareness. They have also been more thorough in their fee disclosure, which has resulted in an increase in their published costs.
“All these factors have combined to put upward pressure on fees in the industry fund segment.”
The graph below shows the fee changes for the major industry funds from June 2005 to March 2008 for an account balance of $50,000
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