We receive many questions from readers about particular superannuation funds and whether we think fund A or fund B is a good super fund. We are an information site, rather than advisory service so we cannot provide advice on the merits of a particular fund, but we can give you some guidance on how to assess whether a super fund is up to scratch.
A common and reasonable question is, what does a good super fund look like? Professional rating companies, such as SelectingSuper, SuperRatings and Chant West, evaluate and rate Australia’s largest super funds against criteria such as:
- investment performance
- number of investment options
- extra services, such as financial planning services and cheaper home loans.
Without a doubt, a super fund’s investment performance and level of fees are the most important factors when considering a super fund. Insurance cover is important too, and may be more valuable to you than fees or performance, especially if you have health issues and you have difficulty obtaining life insurance outside your super fund.
For your reference, I have compiled an 8-step process for comparing super funds. This 8-step process originally appeared in my book Superannuation For Dummies (Wiley), and a later version in my book How to make $300,000 without trying! (30 ways to save your super) (Wilkinson Publishing). I now include an updated version of the 8-step process as a permanent feature of the SuperGuide website.
Step 1: Start with your existing super fund
If you have the right to choose your own super fund, the best place to start your super search is with your existing fund. You may discover your existing fund gives you a competitive super deal.
Step 2: Check what the ratings companies say
Checking out what a rating company says about a super fund can be a useful guide to the high performers in the marketplace, and you can compare the super funds you’re thinking of joining against the funds that rate highly. Rating companies usually publish super fund ratings on their websites, and if a fund receives a high rating the super fund normally crows about it in the fund’s marketing material. The three main super rating companies are:
- Selecting Super
- Chant West
- Super Ratings
Step 3: Obtain product disclosure statements (PDS)
Every super fund must give you a publication called a product disclosure statement (PDS) before you join the fund. In fact the application form for joining a super fund is located at the back of the PDS. In each PDS, you will find a summary page listing the main fees that the fund charges, the number of investment choices available, cost of insurance options and how the fund communicates with you. You can obtain a copy of the PDS for each fund that interests you, including your existing fund.
You may also consider visiting a financial adviser to assist you in your search, but if you want independent advice, be sure to choose an adviser that is not employed by a product provider.
Step 4: Check long-term investment performance
When you’ve made a shortlist of the super funds you’re considering, or assessing the super fund you’re already in, you need to ask some questions such as:
- How are other superannuation investments of a similar type performing?
- Is your investment choice performing worse than industry average or is the entire market suffering low or negative returns?
The market reality is that no asset class consistently outperforms the market in any particular year. Diversification, or spreading your investments over a number of asset classes, means you can benefit from the better performing investments while absorbing the less-than-perfect performance of other investments.
Diversification, however, doesn’t fix choosing dud investments. If the Australian sharemarket is performing badly, then, generally, that part of your fund’s investment also should perform badly. If the Australian sharemarket is performing well and your super fund invests in the Australian market, then that part of your fund’s investment should usually perform well.
Step 5: Check what fees you have to pay
A reasonable motivation for changing super funds is when the fees you pay in your existing fund are significantly higher than other super funds; and you’re not getting anything extra for the higher fees. In other words, your fund is delivering similar or worse returns than other funds, offering a similar range of investment options and providing comparable insurance coverage.
Why pay extra in fees? Not-for-profit funds such as industry, corporate and public sectors funds usually charge the lowest fees because they don’t have to factor in a profit to be paid to shareholders. Also, not-for-profit funds usually don’t pay commissions to financial advisers. Retail funds usually charge the highest fees because your fees also pay for any financial advice you may receive, and the organisation running the fund has to make a profit. Many retail funds have dropped the level of fees in recent times, although if you’re an existing member of a retail fund, then you may be hit with a contribution fee, in addition to ongoing management fees.
Some super funds run for profit are in a category known as wholesale funds, and the fees on these types of funds can be competitive. Unfortunately, you can’t usually join these funds as individuals: you can only these funds via your employer. Most of the not-for-profit funds are wholesale funds, which means lower fees and you can usually join them as an individual provided the fund is open to the public.
Note: If you’re planning to leave a retail fund, watch out for any exit fees you may have to pay.
Step 6: Investigate your insurance cover
If you joined a super fund via your employer, you often get a great price on insurance and you usually don’t have to take a medical to get basic cover. The cover you receive under this arrangement is group cover, which is basically a package deal for all members. If you join a super fund as an individual rather than via your employer, you may not be able to access the competitive wholesale rates for insurance. You may even be rejected for insurance cover if you have pre-existing health conditions.
TIP: If you’re serious about changing funds then secure your insurance coverage in your new fund before leaving your old insurance cover behind. If you’re joining a super fund that requires you to undergo a medical test before giving you insurance you may be left without cover for a month or two. In some cases you won’t be able to get cover.
Step 7: If necessary, you can consult an adviser
Advisers deserve to be paid for providing advice but you have to decide how you want them to be paid, and whether you want to pay for independent advice or biased advice. If you decide that you want to use an adviser, always choose a licensed adviser when seeking investment advice. You can find articles about locating an independent adviser on the SuperGuide website.
Step 8: Make a decision
If you have the right to choose your own fund, you can stay in your existing super fund, or change funds. If you decide to change super funds then you need to complete a Standard Choice Form (SCF) and return it to your employer. Remember to attach contribution and payment requirements for the new fund as explained in the SCF. If you have changed funds, your employer must action your fund choice within two months of you returning your SCF. If you decide to change funds, don’t forget to complete a member application form for the new fund and arrange transfer of any existing benefits.