Superannuation is not an issue that gets people marching in the streets yet. But if the baby boomers' retirement savings fall short of expectations, that could change dramatically. The protest generation is not generally known for turning the other cheek.

When people take a closer look at their superannuation funds, the returns they are getting and the fees they are paying, the issue has the potential to "boil over" warns Robert Prugue, a director of investment research at van Eyk Research.

He's not alone in anticipating trouble down the track. Louise Sylvan, the chief executive of the Australian Consumers' Association, thinks disillusionment over superannuation is a sleeping giant.

The issue at hand is how retirement savings are being eaten away by the superannuation industry through excessive fees. "Very little in the way of explanation will be acceptable" she says.

The immediate time bomb, she says, is when super fund members start receiving their funds' statements for the last calender year and see that their capital has gone backwards.

Increasingly, the spotlight is turning towards the fastest-growing segment of the market the master trusts and how they earn their fees.

Master trusts, as the name implies, are huge trusts which invest in individual fund managers. This allows them to provide investors with a wide choice of investments and the ability to switch between them, often at no cost.

But as gatekeepers, the master trusts "clip the ticket" on every dollar of a super fund member's contributions on its way through to the underlying fund managers.

Their success depends on scale, which allows them greater, or what is known as "wholesale",market power.

The big master trusts such as the St George Bank-owned Asgard and Norwich Union-owned Navigator have the muscle to beat the fund managers down on their management fees.

Master trusts lure investors with more investment choices and lower fees but those advantages are not always as simple, straightforward or beneficial as they seem at first glance.

Master trusts can offer investors genuine benefits but the problem is their lack of transparency on fees and the difficulties investors face when they want to opt out.

The growth and power of the master trusts has been driven by large corporations that no longer wish to run pension funds for their employees and would rather outsource their superannuation responsibility.

Of a total retirement savings pool of $320 billion, $88 billion is invested through master trusts. One of the largest master trusts, Asgard, has doubled the amount of superannuation money it holds in the space of a couple of years.

The success that master trusts are having in winning compulsory superannuation contributions is also being mirrored by the share of voluntary contributions they are attracting.

This "voluntary" superannuation is mostly from those who work for themselves or those employees who simply want to invest for their retirement using their own money. In most instances this voluntary superannuation money is coming via financial advisers.

Financial advisers are keen supporters of master trusts because they enable advisers to outsource the "back office" operations, the time-consuming paperwork that the master trusts are so good at. That frees up the advisers to do what they are good at. An investor's total investment position can be called up with a few key strokes.

They also allow advisers more flexibility in the way they can structure their fees, including the ability to "dial up" trail commissions. Therefore, investors have to be prepared to shop around on costs and not simply accept the first fee structure that an adviser puts in front of them.

Some master trusts offer incentives to advisers such as equity in the master trust based on the amount of business "written" for the master trust.

"In my view such equity and other incentive arrangements are a complete conflict of interest," says Sylvan.

Another point that disturbs Sylvan is that advisers will not offer industry funds to their clients because they do not pay trail commissions.

"Industry funds are cheap and have as good a set of performances as any other funds," says Sylvan. However, industry funds are cheaper because they have the same scale as the larger master trusts and are generally not for profit.

Worse still, advisers have been persuading investors to roll over their industry fund (on leaving their employer) into the higher fee-generating master trusts, Sylvan says.

FEESCorporate, industry and public-sector funds that are not using master trusts cost their members, on average, 0.7 per cent annually, according to the Association of Superannuation Funds of Australia (ASFA). It estimates that fees rise to an average 1.3 per cent for those corporate funds who have outsourced to master trusts although ASFA stresses that this average masks a wide variation. Some corporate funds that use master trusts have fees on a par with industry funds, especially where the employer is subsidising some of the costs of running the fund.

These are good guesses at best as it is impossible to get accurate data.

As fees are expressed in percentage terms, and not in dollar amounts, consumers do not appreciate the big difference fees make to the size of the retirement nest egg, says Sylvan.

She cites the example produced by Ian McAuley, at the University of Canberra, of the worker who starts work at age 21, ends works at age 60, has a starting salary of $25,000 growing to $50,000 at retirement with a super guarantee at 9 per cent and an assumed real (adjusted for inflation) fund return of 6 per cent before fees.

If the investor pays 1 per cent a year in fees he or she will be $58,000 worse off than if the fund was charging only 0.4 per cent.

But Sylvan says the "disclosure regime in terms of charges has been so appalling that most consumers have no idea how much they are paying".

Some funds take their investment-related fees out before crediting the member's account, says Sylvan, so the member has no way of knowing how much they are paying in fees, making comparisons with other funds impossible.

Of course, most rank-and-file employees do not have the choice of which fund receives their employer's superannuation contributions. "Super is supposedly a consumer product but the consumer cannot fire their fund," says Sylvan.

Fund choice is not likely to happen soon. The political parties agree that choice is a good idea but they cannot agree on detail and it is not a priority of the Government.

Sylvan believes the problem of higher fees can be sheeted back to the lack of fee disclosure and how fund managers and the master trust operators get paid.

Fund managers and master trusts get paid a fixed percentage of the money they have under management. Sylvan says this type of "asset-based" remuneration means that the managers' fees grow because the consumer's assets are growing over time.

According to a recent ASFA fees survey, the total investment management costs for superannuation are in the order of $3 billion a year. "It's the [asset-based fee] that is the real killer for most superannuation accounts," comments Sylvan.

"The more super you have, the bigger the fees and charges. So, if you have a balance of $10,000 and the investment charge is 1 per cent you will pay $100 that year. If you have $100,000, you will pay $1000 that year not that it costs a fund 10 times as much effort to invest your $100,000. If it is to be asset-based remuneration then the fee levels need to fall."

Sylvan says a better way for managers to be paid, from the consumer point of view, would be fees related to performance: "If they do not perform they do not get paid."

Not portable

There are some things those wishing to use a financial adviser for their superannuation should be aware of. The first problem is the lack of portability of investments between planners. The second problem occurs at the time the investment is switched from the accumulation to the pension phase.

First portability. The problem facing investors is that planners typically use only one or sometimes two master trust platforms. And, by and large, the master trusts are not compatible with each other.

This puts the investor into a bind if they move cities or become disenchanted with their adviser and want to switch to another. Unless the investor switches to an adviser using the same platform there will be several costs.

The problem of portability does not arise with retail superannuation funds because the investor invests in them directly in their own name.

However, investments in a master trust are in the name of the trust.

If investors want to leave the master trust because fees continue to rise (think of the banks) or because they wish to move to another adviser their entire investment will have to be cashed out and the investors will be up for what is called the "buy/sell" spread when reinvesting the money elsewhere. Units in managed funds have higher entry unit prices than exit (or sell) prices. Though the buy/sell spread varies depending on the type of fund, it can as much as 0.5 per cent. There is a further disincentive to moving out of a master trust in that capital gains may be realised on selling the investments, which may trigger a tax liability.

Not created equal

There can also be problems with master trusts when an investor wants to switch from the superannuation phase to the pension phase.

With the old-style platforms, the assets in the super pool have to be sold and the money re-invested in the pension pool. This means cashing out the investment and the realisation of capital gains and possibly a tax payment.

"Wraps", in the superannuation context, are just like modern master trusts, but may have more functionality such as a wider spread of investment choices.

With a super wrap or a modern master trust, on the transition from one stage to another, the capital gain is not realised and is, in fact, never paid.

Once the money is in the pension stage the rate of CGT is zero. Super wraps and modern master trusts get around the problem of triggering CGT on the transition from superannuation to retirement because the investments are made in the same underlying investment pool with each fund manager.

A planner who uses one of the modern master trusts or super wraps will transfer the assets from the super phase to the pension phase and adjust the investment portfolio (if required) once the investment is in the zero-CGT pension phase.

What super costs

One of the crucial questions investors should ask about master trusts is the costs involved in switching advisers not using the same master trust, and the costs involved, if any, in the transition from superannuation to retirement.

Prugue says investors need to ask advisers who is earning what from investments along the chain. It is essential that investors get a breakdown of both the adviser's fee and the master trust's fees. Investors should also ask the adviser whether there are any restrictions on the investments recommended.

Be aware that some advisers are tied to particular institutions. For example, it is not uncommon for an adviser to be employed by a financial institution that owns the master trust. The master trust menu may have a bias towards the institution's funds.

Master trusts

• Wide investment choice.
• Many have free switching between investments.
• No tax implications as long as switches are made inside the trust.
• The modern master trusts can transition investors to retirement without incurring capital gains tax.

Cons:

• Tax and investment costs incurred in moving between master trusts.
• Adviser has complete flexibility in the fee structure. Fee structure is negotiable and to avoid paying through the nose investors must be prepared to bargain.
• Product complexity makes it hard for the investor to get a handle on the all-up costs.

What super costs

Retail funds: 2 per cent (up to 3 per cent if through an adviser)

Source: ASFA

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