What are the buy/sell spreads charged by my super fund?

Mention a buy/sell spread and even the most interested super fund member will look confused, as this is one of the least understood costs of being a fund member.

So just what are these mysterious charges and how do they work?

What is a buy/sell spread?

Every time you or your employer make a contribution to your super account – or you switch investment options, take a lump sum withdrawal, pay a fee, or receive a super pension payment – it costs your super fund money to buy and sell investment assets.

To help recover the transaction costs of buying and selling the investment assets your savings are invested in, many super funds that use unit pricing charge you a buy/sell spread.

Put simply, a buy/sell spread is the difference between the entry and exit price for an investment option in your super fund. Buy/sell spreads are also charged when you enter or leave an investment product outside the super system such as a managed fund.

The buy/sell spread is charged to pay for the normal transaction costs incurred by your super fund when buying and selling investment assets. These costs include government tax, stamp duty and brokerage fees charged by share brokers.

Super funds that don’t use different buy and sell prices for their units incorporate transaction costs into total investment management fees that are shared by all members.

A fund trustee might choose this option if transaction costs are minimal because the volume of contributions, withdrawals and investment switches is sufficient to avoid trading many of the fund’s underlying assets.

For example, if members have contributed enough into an investment option that day to offset all the withdrawals and investment switches that were deducted from it, then no assets need to be sold – the units can simply be reallocated to different members. 

This approach minimises transaction costs and means the impact is small enough to be equitably shared among all the members of the fund.

How buy/sell spreads affect your super account

In most large super funds, different buy/sell spreads apply to each investment option, with the spreads usually expressed as a percentage.

While buy/sell spreads vary significantly between different investment options (for example, between a conservative and high growth option), they also vary considerably among super funds.

A spread of 0.1% means that the price to purchase a unit is 0.1% higher than the price you would receive to sell the same unit on that day. If you made a contribution of $100,000 the spread would cost $100, leaving $99,900 available to switch to another investment option or withdraw from the fund on that day, based on the sell price.

How your fund calculates its buy/sell spreads

Most super funds use unit pricing to determine how much your super account is worth. These units are similar to the shares you buy and sell in a company.

Each investment option in your super fund has a:

• Buy unit price – This is the price used when you select an investment option, or a contribution is made to your account. The number of units you are allocated is based on this price.
• Sell unit price – This is the price used when money is withdrawn from an investment option for an investment switch, withdrawal, or to pay a direct fee or insurance premium. The sell price may also be used to work out the current value of your account balance. Alternatively, your balance may be displayed based on the ‘mid’ price – the value halfway between the buy and sell price.

The buy unit price and sell unit price are normally calculated by your super fund on the day your transaction request is processed. The difference between these two prices forms the buy/sell spread. It usually takes a few days to determine the unit prices for the day your transaction was processed. This is why you generally can’t see the effect of an investment switch until a few days have passed.

How to find your super fund’s buy/sell spreads

In most large super funds, the buy/sell spreads for each investment option are listed in its product disclosure statement (PDS) and published on its website.

Buy/sell spreads are regularly reviewed (often annually), but may change if transaction costs increase unexpectedly, for example in bad investment market conditions when markets may not be as liquid.

Under fee disclosure rules set by the Australian Securities and Investments Commission (ASIC), super funds are required to provide simple statements itemising their fees and charges. The buy/sell spread you have been charged is listed under the heading Member activity related fees and charges on your annual statement and under the same heading in fee tables contained in product disclosure statements.

Are buy/sell spreads a fee in disguise?

The key point to understand about buy/sell spreads is that they are charged to ensure fund members joining or leaving the super fund – or joining or leaving an investment option – help pay for the transaction costs their decision generates.

Buy/sell spreads are also designed to ensure the members of an investment option who are not joining or leaving at that time are not disadvantaged by your decision.

Most super funds believe buy/sell spreads are a fair way of allocating the investment costs generated when you make an investment switch, contribution or withdrawal.

Buy/sell spreads are not paid to your super fund. Instead, the money is used to cover the external transaction costs undertaken on your behalf. That’s why they are labelled Member activity related fees on your annual member statement.