The price of something and its value can be hard to determine – just look at the type of cars we drive. A low-cost Toyota may represent great value (based on price) but then again, a luxury Bentley may be just as compelling (based on performance) for those lucky enough to be able to afford one.

But when it comes to superannuation, price doesn’t always equal value.

Investment returns are speculative (as many of us learned in the global financial crisis), but fees are charged all the same. The lower the fee, the faster you can save – all things being equal.

But it is also possible to have too much of a good thing. Companies don’t always generate profits by fees charged – they can also be generated by what they don’t pay customers.

Super fees – on the way down

When AMP handed down an annual net profit of $704 million earlier this year, an analyst asked incoming managing director Craig Meller whether he was concerned about the increasing number of low-cost rival superannuation products being launched.

“You’ve got to make sure when you’re looking at comparisons you’re comparing apples with apples,” he said, pointing to the high cash allocations and low interest rates hidden behind the headline fees on some products.

Customers should be concerned about the fees they pay for financial services products, particularly super. It’s a complex product which delivers a speculative return that can only be assessed decades down the track: Just the type which allows companies to build healthy profit margins.

It became such a problem (and remains a major determinant of investment returns) that the government has decided to shift most disinterested investors into new, simplified, low-cost products called MySuper.

In fact, Treasury estimates that MySuper (and its back office-focused SuperStream reforms), which is currently being implemented, will reduce fees by about 40 per cent for the average investor, lifting their final super balance by around $40,000 or seven per cent after 37 years in the work force.

Low fees has been an argument put forward by many not-for-profit industry super funds and a major reason that many have delivered stronger performance than their commercial retail rivals. (The New Daily is backed by members of the Industry Super Funds network, including Australian Super, Cbus and Industry Super Holdings.)

But it is also possible to have too much of a good thing. Profits aren’t always generated by fees charged – they can also be generated by what isn’t being paid to customers, as pointed out by AMP’s Craig Meller.

There’s no such thing as a free lunch

The most aggressive player here is ING Direct. Its Living Super product was launched last September and offers investors the first balanced investment option with no admin, contribution or management fees. It is almost certainly a loss-leader aimed at boosting the use of related ING Direct banking products.

Some of the Living Super costs are met by a cheaper asset allocation: a 50:50 split between growth-producing shares and cash. This is a lower amount than a typical balanced fund which has between 60-76 per cent in growth assets, according to research house SuperRatings’ definition.

By holding less of its assets in growth assets, investors can expect a lower return over the long-term (although potentially with less volatility). Nonetheless, the fund still aims to outperform the annual rate of inflation by 2.5 per cent before fees and taxes (a target it raised from 1.5 per cent at July 1) over the medium term.

A mandatory cash hub (which must hold at least $500 or 1 per cent of the account balance up to $10,000) is currently paying an interest rate of 2.15 per cent compared to the cash option’s 3.25 per cent. ING manages all of the cash funds, which helps fund the home loans it sells other customers (and produces a profit because, like all banks, it lends money at a higher rate than it pays depositors).

This is not to say the product is bad. But some investment tenements, while clichéd, still hold true: There is no such thing as a free lunch.

Life cycle funds: A good idea that comes at a price

A similar issue occurs in several recently-launched “life cycle” (or “life stage”) funds, which automatically shift an investor’s super to more conservative assets, such as cash, as they approach retirement. It is a worthwhile concept: an investor in their 20s has decades of employment to overcome a sharp share market downturn, whereas an investor in their 60s approaching retirement can have their life savings wiped out.

However, life cycle investment fees often remain constant, even when an investor’s portfolio is shifted predominantly to lower-cost assets such as cash and fixed interest.

For example, BT’s Super For Life charges a young investor (born in the 2000s) an investment fee of 0.50 per cent fee (and an admin fee of 0.45 per cent and $5 per month) while an older investor (born in the 1940s) is charged the same fee.

The older investor is paying more, despite the fact that almost two-thirds of his or her portfolio is being managed in low-cost cash and fixed interest (compared to the younger investor’s portfolio predominantly invested in shares with minimal cash and fixed interest). Similarly structured products have been launched by Colonial First State, ANZ and Sunsuper.

Simplicity is an important component of MySuper products, but the regulator has still allowed life cycle products to charge up to four different fees according to Rice Warner chief executive Michael Rice.

An investor needs to weigh up whether the convenience of being automatically shifted to a more conservative asset allocation is worth the extra expense or whether to just make the shift themselves when the time is right.

Brendan Swift is a journalist who has been writing about superannuation and financial services for a decade.