Is it time to change your super investment option?

The first step in working out if your super fund is performing is to compare it to how other super funds have performed over the same period. According to superannuation rating agency, Chant West, the investment return for the median Growth super fund for 2018/19 was 7%, with the top performing Growth funds achieving a 9.9% return.

You would expect a similar result within a reasonable range for the Balanced or Growth investment option for all large super funds, which is where most members have their retirement savings. Super funds are regularly rated against their peers by ratings agencies, so check how your fund measures up.

For more about investment returns and comparable fund performance, read these SuperGuide articles:

• Best performing super funds
• Best performing pension funds
• Super fund performance: Latest annual returns
• Annual super fund performance Reckoner: Annual returns for 5 investment categories
• Asset sector performance: Returns over 1 to 15 financial years (to June 2020)
• Asset Sector Performance Reckoner

Step 2: Review your investment option

Around 80% of Australians with a super account have their money invested in their super fund’s default investment option, which is where you are placed if you do not choose an investment option. Default options are usually Balanced or Growth investment options (see table below) and normally have around 60–80% in growth assets such as shares and property.

Default options are designed as an appropriate investment strategy for a large number of members across the many years they will be saving for their retirement. However, it may not be the right option for your particular circumstances.

If you’re unhappy with your super account’s investment return, it’s important to understand how your money is invested. Most funds offer both pre-mixed investment options and options based on a specific asset class like Australian shares, property, cash or fixed interest.

Investment options for large super funds

Source: Table compiled by author and reflects typical options offered by many large super funds

Step 3: Learn about the objective for your investment option

Just as every super fund gives each investment option a different name, each investment option has a different objective. When reviewing your investment option, think about whether its investment objective and level of risk are appropriate for you. Two examples from different super funds are:

Balanced option

• Objective – To beat Consumer Price Index (inflation) by 4% over the medium to longer term
• Likelihood of negative annual return – 5 years in 20-year period
• Risk level – Medium to high

Conservative option

• Objective – Deliver after tax return of inflation plus 1.75% over rolling 10-year periods
• Likelihood of negative annual returns – 1 year in 20-year period
• Risk level – Low to medium

For more about investment options, read SuperGuide articles:

• How to change your investment option: 6 points to check before you switch
• Super investing: How to choose a responsible investment option
• How to choose an investment option for your pension
• What are listed and unlisted investments and why does it matter?
• How investing in infrastructure boosts your super account
• Annual super fund performance Reckoner: Annual returns for 5 investment categories

Step 4: Compare investment performance against the objective

The next step is to review the performance of your investment option against its investment objective.

Super funds regularly report each option’s investment performance against its objective, which is usually expressed in terms of a benchmark. Investment performance is also tracked by the ratings agencies, which will compare each investment option against a common benchmark and rank your option’s performance against similar investment options in other super funds.

For tips on how to compare super funds, read SuperGuide articles:

• How to compare super funds in 7 easy steps
• How to benchmark your super fund

Step 5: Consider your alternatives if you’re unhappy

Armed with all this knowledge, you can now work out whether the problem is your fund, whether your super fund is performing on par with other super funds or if investment markets have had a good or bad year in general.

It’s worth remembering that if you select a lower risk investment option – or an asset class like cash or fixed interest – your investment returns will normally be lower than a higher-risk investment option. When it comes to investing, lower risk generally goes hand-in-hand with lower returns.

As you can’t change the performance of investment markets, some alternatives you may need to consider include:

• Accept more investment risk: Achieving a higher investment return may mean you need to take on more investment risk by investing in more growth-style assets, or by selecting an investment objective involving a higher level of short and medium-term risk. For more on understanding your risk tolerance, read SuperGuide article How to grow your super: Know your risk profile.
• Change your investment option: Shifting your money out of the default option into another investment option within your existing super fund could make a significant difference, depending on your investment option. An option with a different asset allocation may deliver a higher return – but also more risk. For more on switching options, read SuperGuide article How to change your investment option: 6 points to check before you switch.
• Change to a DIY portfolio: If you believe you can do better than your super fund’s professional investment managers, consider moving some or all your retirement savings into a DIY or member choice option within your super fund. This allows you to select your own investments and build a tailored portfolio. The most active DIY option is to start a SMSF, although this comes with significant compliance responsibility as well as investment control. For more information, read SuperGuide’s special section on SMSFs (Self-managed super funds).
• Contribute more to super: For people still saving for their retirement, this is probably the easiest option. Adding extra personal contributions to those made by your employer can help offset lower investment returns. For more, read SuperGuide’s special section on Making superannuation contributions.
• Work a few extra years: For those close to retirement, low investment returns may mean you need to stay in the workforce longer. Toiling away for a few extra years is tough, but it may be the only option if your retirement pot still needs to grow. For more information, check SuperGuide’s special section on Planning for retirement.