Choosing a default fund for your employees

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Default funds: What are they?
Which super funds are acceptable?
How do I know if a fund is complying?
How to choose a default fund
Take care with paid incentives

Employers are required to make Superannuation Guarantee (SG) contributions for their eligible employees into a complying super fund or retirement savings account (RSA) at least four times a year.

But what if your employee doesn’t have a super fund or doesn’t want to choose their own fund?

That’s where you come in. Selecting a fund becomes your job, but you need to know the rules.

Default funds: What are they?

These days most employees can choose their own super fund, but if they can’t or won’t make a choice, you must select an employer-nominated super fund – also known as a default fund – into which you make contributions on their behalf.

The default fund you select must be a complying super fund that meets the various regulatory requirements and obligations for default funds. It must also be registered by the Australian Prudential Regulation Authority (APRA) to offer a MySuper product.

Which super funds are acceptable?

1. Complying funds

When making super contributions on behalf of your employees, you must pay them into a complyingsuper fund or retirement savings account (which is a special type of account offered by banks and building societies for retirement savings).

Compare super funds

2. MySuper products

MySuper products are offered by large super funds and have simple features so they can be easily compared. They normally contain a single investment option, standard insurance cover arrangements and lower fees. They must meet set performance requirements to remain MySuper funds.

How do I know if a fund is complying?

You can check the default fund you select meets these requirements using the register of complying super funds on APRA’s Register of Superannuation Institutions.

You can also check with the super fund’s trustee that it is a complying fund. When it confirms its complying status, the fund must indicate it intends to accept you super contributions and will continue to meet the relevant legal requirements.

To do this, most super funds will provide a notice or letter of compliance stating the fund is a complying, resident and regulated super fund within the meaning of the SIS Act. Compliance letters usually note the fund is a registrable superannuation entity and is eligible to be nominated as a default fund as it meets the minimum statutory insurance cover requirements.

Need to know

If you pay super contributions into a non-complying super fund, your contributions won’t be counted towards meeting your SG obligations. They also won’t be tax deductible and may result in you incurring a fringe benefit tax (FBT) liability.

If you hold a letter of compliance from the super fund, you are protected against non-compliance penalties.

How to choose a default fund

Selecting a default fund for your employees is an important decision for both your business and your employees. Your choice will have a big impact on the retirement enjoyed by your employees.

For that reason, it’s important to select a super fund that operates in the best interest of your employees. Super contributions are your employees’ money, so you need to consider factors like low member fees and strong returns over the long term when selecting a default fund.

It’s also important to think about how the super fund will interact with your business. You want a super fund that makes it easy to administer your super contributions and that acts in the best interests of your business and your employees.

Super tip

Some super funds ask you to become a participating employer before you are able to pay contributions to them. If you agree to become a participating employer you may need to pay your super contributions more regularly – such as monthly, instead of quarterly.

Some of the factors to compare when selecting a default super fund include:

Investment performance: Performance over the past five to ten years
Fees: Administration, investment, advice, switching and buy/sell spread
Insurance: Cover offered by the fund and the cost
Investment options
Extra services available from the fund: Such as financial advice, educational seminars and local representatives.

For more information about fund performance, fees, insurance and investment options, check out these SuperGuide articles:

Need to know

Some industrial and modern awards require employers to pay super contributions for employees into a specific super fund rather than the employer’s default fund.

If the super contributions percentage in an award is below the current SG rate, you must pay extra contributions to reach this minimum amount (currently 9.5% in 2020/21), or you will incur a super guarantee charge (SGC).

Take care with paid incentives

When choosing your default super fund, it’s illegal for a super fund to give you any benefits as an incentive to select the fund as your nominated fund. These incentives can take any form, including corporate hospitality, tickets to sporting events, holidays, or discounted rates on products or services.

The Australian Securities Investments Commission (ASIC) takes a dim view of offering goods or services to influence an employer to nominate a default fund or to encourage an employer to remain with a fund.