The Hidden Costs of Superannuation: Unknown Fees, Poor Performance, and Insurance Pitfalls

Superannuation is a crucial component of your retirement plan, but recent findings are revealing some alarming trends within the industry. Many Australians are unknowingly paying hidden fees, dealing with underperforming funds, and encountering insurance issues within their superannuation. These hidden costs can take a significant bite out of your retirement savings. Let’s take a deeper dive into the statistics behind these problems and explore how you can take control of your superannuation to secure your financial future.

1. The Hidden Fees You Didn’t Know About

Superannuation funds charge a range of fees, but a large number of Australians remain unaware of just how much they’re paying. A recent report by ASFA (Association of Superannuation Funds of Australia) found that Australians are collectively losing $13.3 billion a year in fees. Some fees are hard to identify because they’re buried within your super's investment returns.

• Administration Fees: These can range between $50 to $100 a year, and sometimes even higher.

• Investment Fees: These can range from 0.5% to 2% of your total balance.

• Exit Fees: Although many funds have abolished exit fees, some funds still charge up to $200 for early withdrawals or transfers.

• Insurance Fees: On top of the administrative and investment fees, many super funds charge premiums for life insurance and income protection within your super. These premiums can be as much as $1,000 per year for basic coverage.

A report from The Australian Securities and Investments Commission (ASIC) revealed that approximately one in five Australians are paying hidden fees they were not initially aware of, reducing their long-term super balance.

Action Tip:

Look closely at your superannuation statement for all the fees listed. Compare your current super fund’s fees with other funds to ensure you’re not paying more than necessary. Even a small percentage difference in fees can add up over decades.

2. Poor Fund Performance: Are You Getting the Returns You Deserve?

A significant issue many Australians face with their superannuation is poor fund performance. According to SuperRatings, 25% of super funds have underperformed the median return over the last decade. The 2021 SuperRatings Fund of the Year showed that a typical Australian super fund could have underperformed by as much as $80,000 over a 30-year working life if it didn’t consistently deliver strong returns.

• Top-Performing Funds: Funds that consistently outperform have annual returns averaging 7-9%, while underperforming funds can return as low as 2-3%.

• The Impact of Underperformance: If your super fund’s performance is below average, this can result in significant losses. For example, a $50,000 balance earning 2% annually over 20 years would end up with a final balance of around $74,000, while a fund earning 7% annually would grow to over $193,000.

Despite these disparities, a 2019 study by Investment Trends found that 39% of Australians don’t review their super’s performance regularly.

Action Tip:

If your super fund has underperformed consistently, consider reviewing your investment options or switching to a better-performing fund. Regularly checking your fund’s performance is key to ensuring your retirement savings are growing as they should.

3. Insurance in Super: Uninsured or Overinsured?

Insurance in superannuation is another area that causes confusion and concern. Many Australians have automatic insurance coverage through their superannuation, but this doesn’t mean it’s always the right coverage for you.

• Underinsurance: According to Swiss Re, around 60% of Australians are underinsured. The average life insurance coverage in superannuation is often too low to cover a family’s expenses or a mortgage in the event of death or disability.

• Overinsurance: On the flip side, some individuals end up with more insurance than they need. A 2018 report from the Australian Prudential Regulation Authority (APRA) found that more than $20 billion worth of life insurance premiums were paid by Australians for insurance they didn’t need or couldn’t claim on.

The problem lies in the fact that default superannuation policies often offer one-size-fits-all insurance coverage, which can be inappropriate for your personal needs.

Action Tip:

Review your superannuation insurance coverage and assess whether it suits your current needs. You may need more coverage, or you might find that you're paying for insurance you don’t need.

4. What You Can Do to Take Control

Superannuation is complex, but it’s in your best interest to take a proactive approach. Here are a few ways you can start protecting your retirement savings:

• Review Your Super Fees: Compare your superannuation fees with others on the market using comparison websites like SuperRatings or Canstar.

• Assess Your Fund’s Performance: If your super fund has underperformed, consider switching to a higher-performing fund. The 2020 Chant West Super Fund Performance Report found that Australians could potentially increase their super by $75,000 by switching funds after 10 years.

• Check Your Insurance Coverage: Make sure your insurance within super is adequate. Check with your super provider or a financial adviser to ensure your coverage matches your needs.

• Seek Professional Advice: If you’re unsure about the right steps to take, consulting a financial adviser can help you make informed decisions about your super and insurance.

In conclusion…

The hidden costs of superannuation—whether they be in the form of unknown fees, poor performance, or inadequate insurance coverage—can significantly impact your retirement savings. But the good news is that you have the power to make changes. By staying informed and taking action, you can ensure your super is working harder for you.

At Redwood Financial Planning, we specialize in helping Australians like you navigate these complexities. Whether you're looking to reduce fees, improve your super’s performance, or ensure your insurance is tailored to your needs, our team of experts is here to guide you every step of the way. Don’t let these hidden costs derail your future—take control of your super today with the help of our trusted advisers.

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial, tax, or investment advice. We recommend speaking with a qualified financial adviser before making any decisions regarding your superannuation. Every individual’s financial situation is unique, and personalised advice is essential to ensure the best outcome for your specific circumstances.