Being locked into a high-fee superannuation account could cost you as much as 27 per cent of your retirement balance, according to new research from automated investment service Stockspot.

But the number of funds in Stockspot’s Fat Cat category, which charge high fees and have low returns, has fallen 18 per cent from 638 in 2016 to 521 in 2017, with some Fat Cat funds closing and others reducing their fees. The fees they charged fell to $600 million from $777 million in 2016.

Choosing high-fee funds can be disastrous for those taking a conservative investment position. Baby boomers with more conservative super investment strategies are generating returns of around 3-4 per cent per year.

“Sadly in the past five years, Fat Cat funds with a cautious investment strategy lost members 49 per cent of returns due to fees,” the report found.

Funds managed by Fat Cats fell to $45.6 billion from $59.4 billion in 2016. Stockspot’s research covered 4102 superannuation and managed funds worth $709 billion, and measured performance since 2012.

It demonstrates the erosive power of high fees on super accounts with millennials in Fat Cat funds expected to pay up to 27 per cent of their potential retirement balances in fees over their working lives. Men will lose $334,826 and women $288,641 over their lifetime in fees, the report found.

A low-fee account, by contrast, would take only 8 per cent of potential balances for millennials. Gen X males would lose 20 per cent of balances and females 19 per cent through Fat Cat accounts while those in low-cost accounts would lose 5 per cent.

For baby boomers the difference is less stark with high-fee accounts reducing balances by 10 per cent till retirement while low-cost accounts would cost 3 per cent.

The Fat Cat category is dominated by funds owned by big financial institutions. ANZ (including OnePath) had 218 Fat Cat funds, which together charged its customers $114 million in fees. It was followed by AMP/AXA (87 funds) and Commonwealth Bank (47 funds) while for the first time NAB slipped out of the top five Fat Cat funds with its numbers in that category dropping from 32 in 2016 to 11 in 2017, the report found. 

Overall, the for-profit retail funds were far more likely to be in the expensive categories than not-for-profit industry funds. Retail funds had 38 per cent of their offerings in the most expensive sectors while industry funds had 15 per cent in those categories.

The cost equation- how the funds look. Source: Stockspot

Overall, the industry fund sector costs totalled 6 per cent of retirement incomes while for the retail funds the figure was 16 per cent. But Stockspot warned that recent changes to fund reporting requirements might see the industry funds not look as cheap as they have up till now.

“It appears many industry super funds don’t fully disclose all costs and fees. When the super fund reporting standards change in 2018 we suspect some industry funds with low advertised fees will in fact have total costs that are 50 per cent to 100 per cent higher,” said Stockspot CEO Chris Brycki.

However, Mr Brycki told The New Daily that while industry funds may now have nominally higher fees their returns would not change as they are already calculated after costs.

“Industry funds made up nine of the top 10 performing funds and 14 of the top 16. That shouldn’t be impacted by fee reporting,” he said.

Ensuring value for money in super is vital to returns, Mr Brycki added.

“In some parts of life, paying more gives you more. Investing doesn’t work that way. Every dollar you pay comes directly out of your retirement lifestyle. The message is clear: the more you pay, the less you get.”

*The New Daily is owned by industry super funds