Is your super fund a star performer or a lemon? It’s a question more Australians are asking after the Productivity Commission and the Hayne Royal Commission highlighted widespread overcharging and underperforming across the superannuation system.
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 the first place, 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.
While the Productivity Commission found that default products outperform the system on average, simply ending up in an underperforming fund could halve your super balance at retirement. It also found that a third of all accounts are unintended multiple accounts, eroding member balances by $2.6 billion a year in unnecessary fees and insurance.
According to the Productivity Commission, fixing the twin flaws of underperformance and multiple accounts would provide a new job entrant today with an extra $533,000 by retirement. Even a 55-year-old today could gain $79,000 by retirement.
And then there are fees. The Productivity Commission found 60% of members don’t understand their fund’s fees and charges. The Royal Commission was also critical of high and opaque fee structures and trailing commissions charged by banks and financial institutions.
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 it’s default Balanced or MySuper option where almost most Australians are invested. Or you may have chosen a High Growth, Growth, Conservative, Capital Stable or Sustainable pre-mixed option.
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) or 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 seminars, webinars and advice and calculators to estimate your retirement benefit, income in retirement or the potential benefit of a transition to retirement pension.
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 balanced option of 3, 5 and 7 years by SuperRatings:
- Target return: Consumer Price Index (CPI is a measure of inflation) plus 3% a year over 10 years, CPI plus 4% over 20 years. For example, if CPI averages 2% then the target return is 5% a year after fees and tax over 10 years, and 6% a year over 20 years.
- Likelihood of a negative return: 4-6 years in every 20-year period.
- Asset mix: growth 75%, defensive 25%.
- Risk level: high (the higher the level of growth assets, the higher the risk of volatile market returns and losses in any one year).
- Who does this option suit: investors with a 5-year plus time horizon.
Capital stable option
- Target return: CPI plus 2.5% a year over 20 years.
- Likelihood of a negative return: 1-2 years in every 20 years.
- Asset mix: growth 33%, defensive 67%.
- Risk level: low to medium.
- Who does this option suit: investors with a 5-year plus time horizon.
Compare your fund’s targets with the actual returns reported on your annual statement. Returns will be shown for each year over the past 3-5 years, and on an annual compound basis, usually over 3,5 and 10 years.
Learn more about superannuation investment options in the following SuperGuide articles:
- Investment performance: Assess your super fund in 4 steps
- Want investments that help you sleep? Understand your risk profile
- Superannuation investment: What is the difference between a balanced and growth option?
- Responsible investment: A guide to investing your values with your super account
- Super pensions: choosing an investment option in retirement
- Investment returns after retirement: Understanding the 10/30/60 Rule
- Super control: How to switch your super account’s investment option
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.
Definition: A benchmark, used in this context, is a measure that is used to compare the performances of investment portfolios and super funds.
For example, Australian Super (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 Australian Super’s balanced return is higher than the SR50, 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 5, 7 and 10 years. This will tell you if your fund is a consistent over or under performer.
- Super funds return 0.8% for 2018 calendar year
- Super funds gain 9.4% for 2017/2018 financial year
- Superannuation Investment Performance Reckoner: Discover annual returns for 5 investment options
- 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:
- Top 10 performing super funds for 2018 calendar year (and previous years)
- Top 10 performing super funds for 2017/2018 financial year (and previous years)
- Super stars! Top 30 super funds over 5 years
- Retirement performers! Top 30 pension funds over 5 years
- Top 10 performing super funds over 10 years (to 30 June 2018)
- Top 10 performing super funds over 15 years (to 31 December 2018)
Note: The returns published by your fund may differ slightly to the returns published on comparison sites due to the way they analyse and group data, so check their methodology in the fine print.
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. 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 pension 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:
- What are average super fund fees?
- Comparing super funds: 10 fees and charges you need to know about
- Super and pension funds with the lowest fees
- Super fund fees: Do lower fees mean better net returns?
- Investment returns: Does your super fund use a crediting rate or unit pricing?
- Buy/sell spread costs: Why these charges may shrink your super
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 SMSFs: How much does a DIY super fund cost?
The Productivity Commission was right to highlight issues with fees. 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. Unfortunately, fees are difficult if not impossible to benchmark with any accuracy.
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.
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 which 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 a 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 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 are 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. For more on contribution strategies, see our superannuation contributions strategies section.
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 phone.
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 negative returns 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 handle the switch for you.
Superannuation 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 do make careful, considered decisions.