Performance Fees in Superannuation — How They Work and Whether They're Worth It

Performance fees are additional fees charged by investment managers when their returns exceed a specified benchmark. In superannuation, performance fees are most common in options that use active management — particularly those with exposure to unlisted assets, hedge strategies, or external specialist managers.

How Performance Fees Work

A performance fee is structured as:

“X% of investment returns in excess of the benchmark”

Common structure:

• Performance fee: 15–20% of returns above the benchmark
• Benchmark: Often CPI + a fixed percentage, or a market index (e.g., ASX 200, Bloomberg AusBond)
• Calculated annually or quarterly

Example:

• Benchmark: CPI + 3% = approximately 5.5%
• Actual return: 9%
• Outperformance: 3.5%
• Performance fee: 20% × 3.5% = 0.70% of assets

In this case, the member still benefits (net return = 9% − 0.70% = 8.30% vs benchmark of 5.5%), but the fee is significant.

Where Performance Fees Appear in Super

Performance fees are most common in:

Large industry funds (AustralianSuper, Hostplus, Aware Super) use external specialist managers for certain asset classes — these managers often charge performance fees, which flow through as part of the ICR.

How Performance Fees Are Disclosed

Under RG 97 (ASIC’s fee disclosure requirements), performance fees must be disclosed in the PDS. They are typically:

• Included in the Indirect Cost Ratio (ICR)
• Or disclosed as a separate line item: “Performance fee: estimated at X% p.a. based on prior year”

Because performance fees vary year to year (they depend on whether the manager outperforms), the disclosed figure is an estimate based on recent years. Actual fees may be higher or lower.

Are Performance Fees Worth It?

Performance fees are theoretically aligned with member interests — the manager only earns more when they outperform. But in practice:

Arguments for:

• Aligns manager incentives with member outcomes
• May attract higher-quality investment talent
• Justifiable if net-of-fees returns consistently exceed peers

Arguments against:

• “Heads I win, tails you lose” — managers earn performance fees when they outperform but don’t return fees when they underperform
• In a good year for markets, many managers earn performance fees even without genuine skill (market beta, not alpha)
• High-water mark provisions help, but are not universal
• Performance fees can be difficult to predict and compare across funds

The key test: Does the option’s net return (after all fees including performance fees) exceed comparable passive/low-cost alternatives over 10+ years? If not, performance fees are reducing your retirement savings without compensation.

High-Water Mark Provisions

Many performance fee structures include a high-water mark: the manager can only charge performance fees if cumulative performance exceeds all prior peaks. This means if the fund loses money in year one, it must recover that loss before earning performance fees again.

High-water marks are a member-friendly feature — check whether your fund’s performance fee arrangement includes one.

Frequently Asked Questions

Can I choose an investment option without performance fees? Yes — index or passively managed options within most funds have no performance fees, since there is no active manager seeking to outperform a benchmark. MySuper default options at large industry funds typically disclose low or zero estimated performance fees. Look for options described as “indexed,” “passive,” or “market-linked” in the fund’s investment guide.

How much do performance fees typically add to total costs? In a strong market year, performance fees in active or alternatives-heavy options can add 0.20%–0.80% on top of base fees. In flat or negative years, they may be zero. The PDS discloses an estimate based on recent years — in years following strong markets, the disclosed estimate can understate the actual cost. Over a full market cycle, the average contribution is typically 0.10%–0.40% for a fund that uses active management extensively.

Do performance fees appear on my annual statement? Performance fees are usually embedded within your net investment return rather than shown as a separate deduction on your statement. They are not itemised as a dollar amount in the way administration fees often are — they simply reduce the unit price or credited return. This is one reason performance fees are difficult for members to track. The PDS must disclose an estimated figure.

If a fund earns a performance fee but I joined mid-year, do I pay it? Performance fees are generally charged at the fund or option level — they reduce the unit price or reported return for all members in the option, including those who joined during the year. This means you may effectively pay a partial performance fee even if you were not invested for the entire period when outperformance was generated.

Is there a regulatory cap on performance fees in Australia? There is no specific regulatory cap. ASIC’s RG 97 requires disclosure but does not limit the rate. In practice, competitive pressure and the APRA performance test (which measures net returns) act as a constraint — a fund charging excessive performance fees will show lower net returns and risk failing the annual test.

How do performance fees in super compare to retail managed funds? Super funds using external specialist managers typically pass through those managers’ performance fees via the ICR. The rates are often similar to retail managed funds using the same managers — 15–20% of outperformance is standard. The difference is that in a super fund, you access these managers through a pooled structure, which may give you lower entry thresholds than retail investors can access directly.

For more: How Super Fees Are Calculated, Indirect Cost Ratio, Total Cost Ratio, How to Read Your Super PDS. For advice on your situation, speak with a licensed financial adviser via MoneySmart.