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Superannuation is like any long-distance journey; you want to make sure you know where you are headed and how to reach it. That includes finding a vehicle that’s fit for purpose. Otherwise, you could end up short of funds to enjoy your destination – in this case, retirement.
Whether you are choosing your first super fund, consolidating two or more funds into one, or wanting to switch to something better, it pays to invest some time in thinking about what you need in a fund and then comparing what’s on offer.
Most people these days can choose their fund unless you happen to be an employee in a defined benefit fund or covered by an industrial agreement. If you don’t choose a fund your employer will pay your Super Guarantee (SG) contributions into a MySuper account chosen by them or identified in an industrial award. You may be lucky and end up in a high-performing default fund but, unless you verify this is the case, what you don’t know could be very costly.
The following steps are designed to guide you through the process of comparing and choosing a fund that will get you where you want to go.
1. Know what you want
Before you start comparing the market for any major purchase, be it a car or a super fund, it’s important to think about what you want. Otherwise you could end up paying for expensive extras you don’t need. Or you could sign up for a product that lacks the features you do need.
To a certain extent, you get what you pay for. A fund with a wide range of investment options and scope for active management and individual tailoring will generally charge higher fees than a MySuper product.
MySuper is designed for members who want a hands-off, easy to understand, no-frills fund with low fees. Personal super products are designed with the self-employed or self-directed in mind while retirees drawing down their super need a pension account.
If you are interested in taking full control of your super, a self-managed super fund (SMSF) may be more your speed. You can find out more about whether an SMSF is right for you here.
An increasing number of Australians, particularly younger members, want the ability to choose a sustainable or socially responsible option, or a fund that takes ESG (environmental, social and governance) issues into account in all investment decisions.
Your time horizon and appetite for risk is also a factor. Younger members can afford to take on more risk because they have longer to ride out short-term market fluctuations so a high growth option with a good track record is important. Or you may be interested in fund with a lifestage or lifecycle option that automatically adjusts your asset allocation, or the mix of high- and low-risk investments, as you age. Older members may be interested in a fund that provides a seamless transition into a highly rated pension account.
It’s not all about investments and returns. Do you want a fund with a good insurance offering, the ability to monitor and transact from your mobile, free or low-cost advice or the ability to make a binding death benefit nomination? (Binding nominations provide more certainty over who inherits your super when you die.)
2. Explore your options
If you are already in a fund, check its website or annual reports so you know what it does and doesn’t offer. Also check its investment performance over three, five, seven and ten years as well as its fee structure. Then go online to research and compare other funds on offer.
The three most established comparison websites are:
- Chant West – for $55 you can compare up to three funds
- SelectingSuper – for $69 you can compare two funds
- SuperRatings – offers free fund ratings and top 10 funds in various categories, but no side-by-side comparisons.
All produce annual performance tables and fund ratings as well as educational material. The ratings methodology of each group is slightly different, but they all use a combination of factors including returns, fees, insurance offerings and member services.
3. Survey the investment landscape
Most super funds these days offer an extensive a la carte menu of investment choices. You can mix and match your own portfolio of shares, property, fixed interest, cash and other assets, or choose from a selection of pre-mixed investment options.
Conservative pre-mixed options contain mostly lower-risk defensive assets such as bonds, cash and fixed interest investments. Growth options hold mostly higher-risk shares and property. Balanced options are more equally weighted between the two. In practice though, Balanced options can hold up to 70 per cent growth assets, so drill down and check the asset allocation.
For those who want more control but may not have the account balance or inclination to run their own SMSF, many funds now allow you to buy and sell direct shares and exchange-traded funds. If you are happy with your fund’s default MySuper option, lower fees and lack of choice can perform well but you should check it against similar MySuper products to make sure.
4. Compare performance history
Past performance is no guarantee of future returns, but you can have more confidence in a fund with a track record of above average returns over at least five years.
You will also notice that short term fluctuations from one year to the next tend to even out in the long run. This is particularly evident with high growth options, which invest mostly in shares. These can fluctuate widely in the short term but tend to provide higher returns over longer periods, whereas conservative options produce steadier, lower returns over time.
If the thought of losing a sizeable chunk of your fund’s value in a single year makes you anxious, or you are within a few years of retirement, then a more conservative investment option might help you sleep easier at night.
When checking performance, make sure to compare like with like. For example, compare high growth options with other high growth options and life-stage options with other life-stage options with a similar methodology. This is especially important when comparing balanced funds because the tilt towards growth assets can vary enormously.
SuperGuide publishes the following guides on the top performing super and pension funds:
- Best performing super funds: All Growth category (96–100%)
- Best performing super funds: High Growth category (81–95%)
- Best performing super funds: Growth category (61–80%)
- Best performing super funds: Balanced category (41–60%)
- Best performing super funds: Conservative category (21–40%)
- Best performing pension funds over 5 years (to March 2020)
5. Add up the costs
Small differences in fees can add up to a big dent in returns over the life of your super. The amount of money available to you in retirement will depend on the amount you and/or your employer contribute plus your investment returns less fees and tax. It’s not uncommon for people to spend a great deal of time chasing returns or trying to minimise tax, while fees fly under the radar.
Superannuation funds are required to disclose their total fees and charges in their Product Disclosure Statement (PDS) and your annual statement. These include an administration fee to cover the costs of managing the fund and your account, investment fees to cover the cost of managing your investments and performance fees where applicable. While exit fees are pretty much a thing of the past, do check if there is a fee for advice and if you are getting what you pay for.
There are plenty of low-cost funds with total annual fees well below 1% of your account balance, but fees should never be looked at in isolation. Funds with a lot of money in property and private equity, for example, tend to have higher costs than funds with mostly cash and bonds. The trade-off for higher risk and costs ought to be higher returns in the long run, but don’t assume this is the case. Check it out.
For an estimate of the impact fees (and returns) could have on your final super balance, check out SuperGuide’s Super fees and returns calculator.
6. Don’t forget insurance
Taking out insurance cover inside your super fund can be very cost effective because funds are able to negotiate group rates. Many funds offer life insurance, total and permanent disability (TPD) and income protection at competitive rates.
Do be aware though that insurance premiums inside super are paid from your account, so there is less money earning a return. This may be a price you are willing to pay if you don’t have enough free cash flow to pay premiums outside super.
For some people with an SMSF, the attraction of low-cost insurance is enough to justify keeping a small amount of money in an industry fund on the side. However, default cover in super is generally limited, so you may need to top up your cover. It can also be slower to pay and unless you have a binding nomination your chosen beneficiaries may not receive your insurance death benefits.
Many employees in public offer funds will have default insurance cover. However, under the Protecting Your Super reforms introduced on 1 July 2019, younger members under age 25 must opt-in to life insurance cover. This move was designed to protect younger members with low account balances from having their savings eroded by fees for insurance they may not need or want. Under the same legislation, super funds must cancel your insurance cover if your account has been inactive (that is, received no contributions) for more than 13 months.
No matter what your age, the onus is on you to check the type, level and cost of insurance you hold in super and compare what’s on offer elsewhere. You can find this information on your annual statement and funds’ websites.
Learn more about super and insurance.
7. Follow your leads
Once you’ve identified some promising funds, it’s time to probe deeper. Check their website, download their PDS and phone or use online chat to ask questions. Making contact with a fund has the added bonus of giving you an insight into their customer service.
At this stage you might also want to check for other services and benefits that are important to you. Some may want a fund that offers free or low-cost financial advice, educational tools and member information seminars. Others may want cheap insurance or a seamless transition from accumulation to retirement phase.
If you decide to switch or consolidate two or more funds, you can do this by filling in a rollover form and sending it to your chosen fund or by logging in to your MyGov account.
Comparing and choosing funds is now easier than ever, thanks to the amount of information online. Happy hunting!