Superannuation fees: raises concerns

21st January 2008
By Petter Ingemarsson

Superannuation funds charges have attracted a number of criticisms.

Last month, the deputy governor of the RBA criticized the fees charged by retail superannuation funds. Retail funds typically charge higher fees than industry super funds, and as a result generally perform weaker financially over time. Although the fees have contributed significantly to Australia's booming wealth management industry, many believe that these fees are unjustifiably high.

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In an opening speech last month at the Australasian Finance and Banking Conference, Ric Battellino, deputy governor of the Reserve Bank of Australia (RBA), expressed criticism of the fees charged by retail superannuation funds. These higher fees have been shown to lead to weaker economic performance for retail funds as compared to industry funds.

"The cost of providing investment services to retail investors is also a challenge that needs to be addressed," commented Mr Battellino, and notes that "fees and expenses on retail funds are typically higher than for industry and corporate funds." Mr Battellino's comments have led to further criticism, with some industry observers seeing this as an early warning that regulators may come to examine the fees charged by superannuation funds. The focus for Australian regulators so far has been to ensure that management fees are disclosed to consumers, instead of engaging in direct regulation of those fees.

Compulsory superannuation payments have helped make Australian wealth management a booming industry, with A$1.7 trillion dollars currently under management. At the same time, wealth management has become very profitable for financial institutions, as there has been a constant influx of funds. However, some observers have been concerned that fees on retail superannuation funds have stayed unreasonably high, given technological advances and economies of scale in the industry.

Industry superannuation funds have run a successful advertising campaign highlighting the higher costs that retail funds entail, and most consumers are probably aware of the fee discrepancy. However, switching behavior is fairly sluggish, and consumers somewhat apathetic, when it comes to superannuation funds. In light of this, it is possible that the RBA would engage in direct regulation of superannuation fees for these reasons, especially since superannuation contributions are mandatory.
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