Vanguard’s Superannuation Plan: Is It the Best Option for Your Retirement? Our In-Depth Review

Bryce: [00:00:31] Welcome to get started investing in a podcast where we help you learn to invest in 15 minutes or less. Each episode we take one real world business story and apply a key investing lesson to help you build your investor toolkit. If you're joining us for the very first time, welcome. We strongly recommend that you scroll up and start at episode one. While we are licensed, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes. Any advice is general advice only. With that said, let's crack on. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you doing? 

Alec: [00:01:06] I'm very good, Bryce. Good to be here. 

Bryce: [00:01:08] Yes. 

Alec: [00:01:08] Another week back. 

Bryce: [00:01:09] For another week. A bit of a shaky start there. But anyway. 

Alec: [00:01:12] I will edit it off. It will sound perfect. It will be great. But look, we're here today to talk about a particularly Australian news story, but I think the lessons for it are global because wherever you're listening in the world, chances are you've got some form of government sponsored retirement account. Yeah. 401k over in the US. Can't remember what it's called in the UK. Superannuation here. The government wants us to save for retirement essentially and we are seeing more and more competition in that space. Yeah. And the biggest asset manager in the world or the second biggest asset manager in the world has taken a big step here in Australia and that's what we want to unpack today. Yes, Vanguard have launched their own superannuation fund. 

Bryce: [00:01:59] They have in the UK their pension funds. 

Alec: [00:02:02] Makes sense. Yes. What are they in Canada? 

Bryce: [00:02:04] Pension funds. I'm pretty sure. 

Alec: [00:02:07] Yeah. I think Canadian pension funds are just stupid amounts of money. Yeah. Yeah. 

Bryce: [00:02:12] My pension 401 superannuation. Superannuation. There's something wherever you are. Yeah. In the major or there's not. 

Alec: [00:02:20] Your investment account. 

Bryce: [00:02:21] Yes. So yes. Vanguard into super. So it started three years ago, Ren, when they decided to give back about $100 billion in funds to the superannuation funds. Yeah. 

Alec: [00:02:34] They were fund managers for super funds. Yeah. And they said take your money back, we're going to do it ourselves. 

Bryce: [00:02:39] Where in. Yeah, that was three years ago. It was big news. We thought, wow, it's going to happen and it's taken this long for them to launch their own. 

Alec: [00:02:47] And just put that number in perspective. They gave back $100 billion. Do the quick maths on that. Let's say maybe that they were charging ten basis points because their fees were probably lower at that scale. To those institutional managers, ten basis points on $100 billion is $100 million in annual fees, even if it was one basis .0.0 1%. That's $10 million in annual fees. Vanguard Australia gave up. Yeah, they gave back. Yeah. So you would expect whatever super offering they came out with, they expected to at least make $100 million from a year. Yeah. I mean that's the simple back of the envelope maths. 

Bryce: [00:03:27] It is simple and it's a ballsy move I Guess. 

Alec: [00:03:31] That put the industry on notice. Everyone was like Vanguard has 11 trillion Aussie dollars under management. Yeah, they're big. Yeah. They're giving 100 billion Aussie back. Yeah. They're going to take a big swing here in three years. They've taken their swing.

Bryce: [00:03:46] Well, I mean it's a massive market, superannuation, it's only going to grow. So it made sense for me at the time, but that still makes sense.

Alec: [00:03:53] But that logic holds if they were just managing four other super funds as well.

Bryce: [00:03:57] Yeah, but as we can say, they're probably going to make it. 

Alec: [00:03:59] You reckon.

Bryce: [00:03:59] More money. 

Alec: [00:04:00] I reckon the swing was kind of, uh, fizzle. 

Bryce: [00:04:04] Do you think so as well? Anyway, let's. So they've come out with a product and the management fee for the product is 0.58%. 

Alec: [00:04:13] For most. 

Bryce: [00:04:14] Option. Most of the options. Yeah. 

Alec: [00:04:16] Okay. So that sounds reasonable. 

Bryce: [00:04:19] Yeah. So we plugged it into the ATO website where you can compare faces, but there were some warnings. So when you put Vanguard against and the website is called the ATO, your super website, it allows you to compare face when you put it in. It does kind of look cheap. 

Alec: [00:04:38] Yeah. 

Bryce: [00:04:39] Which is good. 

Alec: [00:04:39] But the ATO website is a little not misleading. Just a little incomplete. Yes. And it doesn't really compare apples to apples. The vanguard option is an index option. And a lot of the ATO options that they're comparing aren't if you put a Vanguard index option against a HOSTPLUS or Australian super index option, it actually is in Australia. No, there are cheaper options out there and if that jargon doesn't make sense, we'll get to it. But before then we've actually found an epic resource that does the job of comparing fees apples to apples. It's from the Reddit subreddit of finance. So hat tip to those guys. We are standing on your shoulders in this episode but we will share the link to that in the. It's a forum. So if you want to actually say the apples to apples comparison, head over to the Equity Mates forum. The link will be there. 

Bryce: [00:05:37] Yes, sir. And this leads us to the lesson, because this did get us thinking about fees. Vanguard's, you know, position themselves is one of the lowest cost ETF providers in the market. And you would have thought that when they come into the super game, they position themselves similarly. But when we had a look at some of the super funds that are out there, there are cheaper options. And it got us to the lesson that fees do matter. We know that we say we hate fees and returns net of fees matter more. 

Alec: [00:06:05] Yeah not end but. 

Bryce: [00:06:07] But. 

Alec: [00:06:08] Yeah, yeah. Yeah. I guess that's why fees matter because fees eat away at your return. So when we say we hate fees, it's because it lowers your return. And so really what really matters is returns net of fees and we'll get to that. But just as we tweeted this out a couple of years ago, I just had a search of Twitter to find it because I think it best exemplifies why fees matter. If you invested $1,000 in Warren Buffett's Berkshire Hathaway in 1965 when it started, by 2019, you would have $27 million. Not bad. Yeah. If Warren Buffett charged a 1% management fee, that 27 million would be 25 million. If Buffett charged a 2% management fee, that 27 million would be 9 million. So you lose two thirds of your return. And if Warren Buffett charged the traditional 2% management fee and 20% performance fee, which is like standard hedge fund, well, in the past, the old hedge fund fee structure, you would have $6.5 million. Small differences in fees can make a big difference in your return. And so that's why we hate fees, because it affects your returns. So then the question is, when we're thinking about retirement accounts, when we're thinking about super, how do we assess fees and judge it against the potential return? But before we do, then price, we need to take an outbreak so we can put some more money into our retirement accounts and figure out the returns. So Bryce, before the break, we're talking about Vanguard's entrance into the superannuation industry, into the retirement account industry and the fees, because that was really the focus of the announcement. At first glance it looks like it was potentially cheaper at second look, it actually doesn't look that price competitive on fees, but really the conversation on fees is only half the conversation. And we've pulled out an example that really illustrates why returns net of fees is more important than just looking at fees alone. Now, we have chosen AustralianSuper to compare because I think it is Australia's biggest super fund? 

Bryce: [00:08:21] One of yeah. 

Alec: [00:08:22] It's kind of like the one you think of. It's really the name is. 

Bryce: [00:08:26] Hostplus is the one. 

Alec: [00:08:27] I always think, oh really? Yeah. You love before investing. 

Bryce: [00:08:29] Well it's because I was with them for ages. 

Alec: [00:08:31] Because before an investor told.

Bryce: [00:08:32] You to, not because it was the default one that I got put in very first thing. 

Alec: [00:08:36] I think that's the cheapest one if you just go the indexed option. Yeah, yeah, yeah. So we had a look at Vanguard's high growth superannuation fund and it is basically exactly the same as the Vanguard Diversified High Growth ETF. The VDHG people in the fire community would be familiar with it. Yeah, to give you an idea of just how similar it is, we looked at the asset allocations for both of them. Australian shares, 36%, international shares 26%.

Bryce: [00:09:07] This is for the superannuation fund. 

Alec: [00:09:08] Well. This is for both. Yeah. International shares hedged 16% global bonds, 7%. International shares, small companies, six and a half percent. Emerging markets 5%. Fixed interest 3%. The asset allocation in the ETF and the superannuation fund on the other side. So we can use VDHG, the ETF and look at their returns and their returns net of fees and compare it to Australian super to really illustrate the point of why fees are only half the story. Yeah, so talk to me about the returns of Australian super and VDHG. 

Bryce: [00:09:42] So VDHG has only been around for a few years, so we don't have a huge comparison, but nonetheless we can have a look, so. GROSS So this is not net of fees. VDHG has returned 3.62% per annum. When you then strip away fees, you have a return of 3.34% or include face. I should take out the impact on my face. Yeah. 

Alec: [00:10:07] So 3.34% per annum over the last three years. 

Bryce: [00:10:11] Yeah. So that's for VDHG which is the Vanguard Diversified High Growth, which is representative, I guess, of the super fund as Ren just demonstrated it's pretty much exactly the same. If you then look at the Australian Super Index comparison, their high growth fund returned 6.32% per annum. It's a bit unclear whether or not that's gross, but you would assume it would be, yeah. 

Alec: [00:10:37] You generally assume if they don't say net of fees it's not. 

Bryce: [00:10:41] Yeah, then that balanced option returned 5.59% per annum. So both their growth and balance options have returned almost double. 

Alec: [00:10:51] Yeah. 

Bryce: [00:10:52] The VDHG over the same period of time. 

Alec: [00:10:54] And so even if you netted fees out of AustralianSuper, your return net of face is higher because it's actively managed. The asset allocation is different and I think that is the key takeaway that fees are only half the story. But your return net of fees matters more like you should be okay with paying more fees if your return still does better than that. 

Bryce: [00:11:20] If the cash in your back pocket at the end of the. 

Alec: [00:11:21] Day, that's all that matters in your retirement account. And so Reddit we're onto this straight away. I like some of the commentary on Reddit that was pretty scathing of this offering. We're just surprised at how lacklustre it was. Yeah, yeah. Because yeah, like if you can get a better return elsewhere, that's the main thing. 

Bryce: [00:11:39] Yeah. So while we hate fees, it's always with the lens of keeping in mind net return is the important thing that you're thinking about. At the end of the day, you're looking at long term performance of the manager, long term performance of the index, and then making an assessment against the fees, passive, very active and that balance between the two. 

Alec: [00:12:00] So I think my concluding thought on this whole thing is when you're thinking about retirement accounts these days, you have two options. You have passive where you just take the market of average return or you have active where you pay more and you ask a fund manager to try and beat the average market return to get you more. You pay more, but you try and get more as a result. If you're happy with passive, if you believe that over the long term, active managers can outperform the market average, they can't outperform the index, then the challenge for Vanguard is that there are cheaper options to do that. There are cheaper passive indexing options available in Australia if that's the road you want to go down. And then if you want active management, if you want to try and beat the index, your fees will be higher than what Vanguard offer. But you would expect better returns. And we just saw in that AustralianSuper example that there are funds out there that deliver better returns. So it kind of feels like Vanguard's in no man's land

Bryce: [00:13:00] It does. It's surprising they haven't gone as hard as we would have thought. Yeah, with the scale that they've got, you'd think they could offset some costs anyway. Maybe we could get someone from Vanguard to comment. 

Alec: [00:13:11] Probably not after everything was just said. Well, I'm. 

Bryce: [00:13:13] Sure they'd love to. I'm sure they'd love to explain what's going on. Maybe we'll see in a few years time that it does come down once some funds come in or whatever it may be. 

Alec: [00:13:21] But I guess that's been the Vanguard story. You know, the mutual fund structure, which is probably more relevant in the US. Is that like as more money flows in, the fees get reduced because the company at least I think the US companies owned by the owners of the fund. Yeah. 

Bryce: [00:13:38] Yeah. Anyway, so that's the story Vanguard or into super. Check it out. We'll share the link that ran that compares a lot of the funds here in Australia anyway. I'm sure if you're listening overseas there's some 401 or pension comparisons, but the main thing is to consider the fees that you're paying. But then if it's a passive or active approach and weighing up the balance between the fees and then the net return at the end of the day. So keep that in mind. But then that's the lesson for today. We'll pick it out next week. 

Alec: [00:14:06] Sounds good.