Is your super fund a star performer or a lemon? It’s a question more Australians are asking, now the Australian Prudential Regulation Authority (APRA) is publishing ‘heatmaps’ to put the blowtorch to underperforming funds.
It often starts with niggling doubts. Fees that are above the industry average, investment performance that lags its peers or an unhelpful response to your queries. You begin to wonder why you chose this super fund, if indeed you did choose it as opposed to having it chosen for you by your employer or financial adviser, and if you should switch funds.
APRA’s latest heatmap compares the returns, fees and sustainability of default MySuper products and ‘choice’ investment options you select yourself. Disturbingly, 45% of MySuper products and 60% of choice investment options delivered returns below APRA’s benchmarks.
The ATO has also unveiled its new YourSuper comparison tool. So far it only includes MySuper products and has limited functionality, but it’s a step in the right direction.
One positive outcome of all this scrutiny is that more people are taking a close interest in their super, often for the first time. Many have already voted with their feet and switched funds.
Where to start?
Begin by getting to know your fund, or funds if you have more than one. Your most recent annual statement is a good place to start. Is it easy to follow and useful?
Your statement will tell you how your money is invested. The names of investment options may vary from fund to fund but get to know what type of investments and investment mix you hold.
For example, you may be in one of the fund’s pre-mixed options such as its default Balanced or MySuper option where most Australians are invested. Or you may have chosen a High Growth, Growth, Conservative, Capital Stable or Sustainable pre-mixed option.
For those who like a little more control, or who feel they could do a better job themselves, many big funds also offer direct investments in shares, exchange-traded funds (ETFs) and term deposits. Or you can go solo with your own self-managed superannuation fund (SMSF).
Your statement should set out the returns you have earned, the growth in your balance over time, the fees you paid and the type and level of any insurance cover you hold.
It will also provide details of your beneficiaries – the person(s) you have chosen to inherit your super when you die, or your legal representative – and whether you have made a binding or non-binding nomination. A binding nomination offers more certainty that your super will end up in the right hands, but it must be updated every three years and a small fee is charged.
Also spend some time exploring your fund’s website. Most will offer educational material and perhaps help in picking the most appropriate investment option for someone of your risk profile and time frame. It may also offer information in the form of seminars, webinars and general advice, and calculators to estimate your retirement benefit, income in retirement or the potential benefit of a transition-to-retirement pension. Some funds also offer personal financial advice for a fee.
Does your fund allow you to connect and transact in the way you prefer when you prefer? It’s a generalisation, but older members often prefer to get information via print, website or phone, while younger members like to connect and transact on the go via a mobile app or online chat.
How to benchmark your fund
The following is our 6-step guide to assessing your super fund.
Step 1: Is your fund meeting its objectives and yours?
The first step is to see if your fund is meeting its own return targets and objectives. Just as importantly, does it reflect your own risk and return profile, based on how many years you plan to remain in the option, the expected volatility of returns and the likelihood of a negative return in any one year?
These details should be set out on the fund’s website where it outlines its investment options.
Here are a couple of examples from Hostplus, named as the best performing Growth option over one and ten years to December 2021 by Chant West. Note that Hostplus’ Balanced option aligns with Chant West’s definition of Growth (61–80% growth assets).
Compare your fund’s targets with the actual returns reported on your annual statement. Returns will be shown for each year over the past three to five years, and on an annual compound basis, usually over three, five and ten years.
Learn more about superannuation investment options in the following SuperGuide articles:
- Risk profiling and your investment choice
- How to choose an investment option for your super pension
- Is it time to change your super investment option?
- What is a growth asset? Time to set some standards
- Balanced, Growth, Defensive: What’s in a name?
- How to change your investment option: 6 points to check before you switch
Step 2: How does your fund compare?
Once you are familiar with your fund or funds, it’s time to compare its performance against the market. Start by checking your returns against the benchmark used for the option you have chosen. You should be able to find this on your annual statement, often in a table outlining returns.
For example, AustralianSuper (the country’s biggest super fund) benchmarks its default Balanced option against the SR50, or the median return of the top 50 Balanced options tracked by SuperRatings. If AustralianSuper’s balanced return is higher than the SR50 median return, that means it has performed better than half of the top 50 Balanced funds. Anything lower would put you in the bottom 50% of funds.
Don’t just look at the most recent annual return, but how your fund compares over the past five, seven and ten years. This will tell you if your fund is a consistent over or underperformer.
- Super fund performance: Latest annual returns
- Annual super fund performance Reckoner: Annual returns for 5 investment categories
- What are lifecycle super funds, and how do they perform?
Step 3. Which funds offer the best returns?
Your fund might be beating the benchmark, but do you have a sneaky feeling other funds are doing even better? To find out, check your fund’s ranking against the best performers in the following SuperGuide articles:
When you compare your fund’s performance it’s important to compare like with like. This means comparing conservative investment options with other conservative options, or sustainable options with other sustainable options.
Just to confuse matters, ratings agencies themselves use different definitions. Close to 80% of Australians in major funds are invested in their fund’s default investment option which is usually the same as their Balanced option.
Chant West defines ‘balanced’ as holding 41–60% growth assets (mostly shares and property) and the balance in defensive cash and fixed interest. It’s Growth category (61–80% growth assets) aligns with what many funds call Balanced. SuperRatings defines balanced as 60–76% growth assets. You need to know where your fund sits on the growth/defensive scale before you can make meaningful comparisons.
Also be aware that accumulation and pension funds will have different returns even where they hold identical investments due to the different taxation that applies to each. If you are in your fund’s pension product, check against other pension products. These tend to have slightly higher returns than the accumulation equivalent because of the favourable tax treatment of super in retirement phase.
SMSFs will need to set their own benchmarks. Even so, it’s worth keeping an eye on the returns achieved by public offer funds with a similar investment mix after tax and fees. If your fund is up there with the best or doing even better, well done. But if it is underperforming then you might question why you are putting in the extra effort required to run your own fund.
Step 4: Are the fees reasonable?
Most funds and comparison sites report investment returns after investment fees and tax. This is important because it gives a closer approximation of the real return on your money than gross returns (before tax). Even so, administration fees and adviser commissions tend to slip through the net.
You can learn more about super fees in the following SuperGuide articles:
SMSFs have additional fees and running costs to consider. As well as investment and administration fees, there is an ATO Supervisory levy, audit fees and actuarial fees. For more on SMSF set-up and running costs see SuperGuide article What are the setup and running costs for an SMSF?
You need to burrow deep into your fund’s annual statement to piece together the total amount of fees and charges you pay, in percentage and dollar terms.
If you are in a MySuper product, your fund is required to display a ‘dashboard’ showing, among other things, the total dollar amount of fees for a member with a $50,000 super balance. This is a good starting point to compare fees between default funds, but you need to check the actual amount you paid on your balance.
APRA’s heatmaps also benchmark fees for most super funds and investment options, but the sheer volume of information can be overwhelming.
To narrow things down, some large super funds allow you to compare funds, and their fees, using technology supplied by one of the fund comparison services. It that’s not available, you can pay for Chant West’s Apple Check service that compares up to three funds side by side. Among other things, you get a breakdown of administration and investment fees and the total dollar cost for your balance and investment option. It also shows transaction fees such as exit, termination and switching fees.
Step 5: Does it offer the choices, services and benefits I need?
Returns are important, but they are not the only measure of a good super fund. If your fund doesn’t offer the investment choice, services or benefits you need, then it could be time to find one that does.
Many large funds these days allow you to invest directly in shares, ETFs and term deposits in an effort to stop the drift of members to SMSFs. If the ability to select your own investments is important to you, you might want to switch funds or run your own. If you want to hold real property inside super, then an SMSF is the only way to achieve this.
SMSFs also offer more flexibility when it comes to estate planning and the distribution of your super to your beneficiaries in the most tax-effective manner when you die.
Life insurance is another important benefit of super. Most members of public offer and corporate funds receive some level of default cover they may not even be aware of. Self-employed members need to apply for cover.
Your annual statement will tell you the type and level of insurance cover you have as well as the total amount of premiums you paid over the past year. The benefit of holding insurance inside super is that premiums are discounted, and you don’t need to have a medical check to qualify. The downside is that cover is often limited, payouts may be taxed, and premiums come out of contributions which means they reduce your retirement savings.
If your existing type of level of insurance is not adequate or appropriate, then you can reduce it, top it up or ditch it for insurance cover outside super which may be tax deductible. Before you do anything, compare your current insurance with what’s on offer elsewhere. Your fund may provide tools to do this, or you could use Chant West’s Apple Check to compare annual premiums for your selected type and level of cover across three funds.
Step 6: Should I switch funds?
If you have followed steps 1 to 4 and you’re not happy with your super returns, you have several options. Before you flick the switch, it’s worth getting back to investing basics.
The amount you have accumulated in super by the time you retire depends on three things: the amount you (and/or your employer) contribute, the returns on your investments and time.
If your fund is performing well but your balance is not growing quickly enough to meet your target retirement income, then you could increase your contributions.
Alternatively, you could plan on working for a few more years before you retire. Not only will this give you more time to add to your balance, but it will also reduce the number of retirement years your nest egg needs to cover.
If your investment option is performing well compared with similar funds but you want higher returns, then you might consider switching to an option with a higher risk and return profile. You can do this without changing funds, often with a simple click online or on your mobile.
For example, if you are in a default or Balanced option you could move up the risk and return curve to a Growth or High Growth option. Many experts believe you should only consider this if you still have a decade or more until retirement and you are comfortable with high volatility and a higher likelihood of a negative return in any one year.
And finally, if your fund really is a lemon or it doesn’t offer the services and benefits you need, then use the comparison sites and tools already mentioned to find a better one and make the switch. Depending on the fund you choose, it may even handle the switch for you.
Super is a long-term investment, but that doesn’t mean you have to stick with the same super fund for the entire journey if it no longer meets your needs or expectations. But neither should you jump ship after a single bad year or unhelpful phone call.
With something as important as your retirement savings, it pays to make careful, considered decisions.