Australians are paying $21 billion in superannuation fees each year, an exorbitant amount that is eating into their retirement savings and increasing the urgency for the government to run tenders to select better funds for savers.
That is the argument tabled by the Grattan Institute, which says there is not enough competition in the $1.95 trillion superannuation sector to drive down fees despite years of debates and reforms.
"There are too many accounts, too many funds, and too many of them incur high administrative costs," Jim Minifie, Grattan Institute productivity growth program director, wrote in his latest report on super savings.
"We pay $4 billion a year above what would be charged by [low cost, well administered] lean funds," he said. "There are significant opportunities to reduce costs in both [default and choice] funds. Over time, the difference between a lean fund that charges say $125 per person and what's implied in MySuper fees today, is about $40,000."
Mr Minifie, who is speaking on superannuation efficiency at the AFR's Banking and Wealth Summit next week, also urged the government to reduce fees by running a tender to select funds to operate default accounts used by most working Australians.
He called for the federal government to close accounts and merge smaller funds that are less efficient. Investment fees paid to fund managers were also too high, with many funds not performing "well enough" to justify the extra fees they slap on members.
"The superannuation industry argues that its $21 billion costs are not excessive, and will fall over time," the report says.
"It opposes a tender for default accounts based on fees, claiming that it would reduce investment quality and net returns. But current initiatives to reduce costs are not enough."
The government should run a tender to make default super funds more efficient by forcing more funds to compete on cost, Mr Minifie said in the report. "A competitive process for defaults could save $1 to $2 billion a year over time. Government should design the tender now and run it as soon as possible," he said.
Australians currently pay more than $200 a year on administration fees for the average default super fund and almost $800 for a fund of choice. The former can be brought down to $100 or under a year, if more funds consolidate and inactive accounts close.
Australia's $1.9 trillion retirement savings system has been in the spotlight through various enquiries including the Stronger Super reforms and the more recent financial system inquiry.
Self-managed super funds remain the fastest growing segment of the market, as more Australians seek to manage their own retirement savings strategies. SMSF trustees pay around $5 billion in administration fees each year.