Super choice survival guide

How to get the greatest benefit from super choice.
 
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  • Updated:6 Jan 2005
 

01 .Introduction

Super-choice

The ability to choose the super fund for your employer’s compulsory 9% Super Guarantee (SG) contributions is known as fund choice. An estimated 5.2 million workers can expect to receive a form, known as the Standard Choice Form (SCF), from their employer before 29 July 2005 informing them that they have this right.

Think long and hard about the consequences of leaving your existing fund, especially if you’re in an industry, company or public sector fund with low fees and attractive insurance benefits. There’s no deadline for exercising your choice so don’t rush.

According to our recent online survey on attitudes to fund choice, 59% of those surveyed were fairly or very satisfied with their current fund, while 10% were dissatisfied. The main reasons for this dissatisfaction were poor returns and high fees.

Give yourself plenty of time to consider your options. Use the introduction of fund choice to review your current super arrangements and give your retirement savings a kick-start. Here are the key questions you need to answer:

  • Are you entitled to fund choice under the new arrangements? More...
  • We think the new choice of fund rules have some serious limitations for consumers. What are the traps you need to avoid? More...
  • What are your options under the new fund choice arrangements and how do you go about exercising them? More...
  • What are your employer's obligations under the new choice of fund rules? More...
  • If you decide to change funds, how do you go about finding a good super fund? More...
  • What do you need to know about super fund performance? More...
  • How do you select the right investment option? More...
  • How do you make sure you don't end up in a fund with high fees? More...
  • How do you choose a good life insurance deal? More...
  • Where can you go for dependable advice on superannuation? More...
  • What does all the jargon mean? More...

Please note: this information was current as of January 2005 but is still a useful guide to today's market.


 
 
 

02.Do you have fund choice?

 

You have fund choice if, before 29 July 2005, your employer gives you the special form called the Standard Choice Form (SCF). You’re likely to have choice of fund if you’re:

  • Employed under a federal industrial award (an industrial award sets out the conditions of employment) or
  • Not subject to any award or agreement.

If you live in WA, and in some circumstances NSW and Tasmania, you already have fund choice under existing state laws.

Around 40% of Australian employees still won’t have fund choice under the new system.

You’re unlikely to have choice of fund if you’re:

  • Employed under some state awards
  • Employed in the public sector and you fall within special categories, for example, you’re a member of an unfunded public sector scheme
  • Employed under an Australian Workplace Agreement or
  • A member of a defined benefit fund. Defined benefit choices should be exercised with great caution and specialised advice.

03.How to use fund choice

 

Changing super funds is a big and important decision that shouldn’t be rushed. If your employer gives you a Standard Choice Form (SCF), that form will specify which default fund your employer has chosen. The action you take will depend on whether your employer has nominated your existing fund or a new fund as the default.

If the default fund specified on the SCF is your existing fund, you can:

1. Do nothing. If you’re happy with your current fund there’s no need to change.

2. Change funds. There are several steps you’ll need to complete to successfully change to a new fund:

  • Find a new fund worthy of switching to.
  • Complete a member application form and arrange to transfer any existing super benefits to the new fund.
  • Complete Section B, questions one, two, three and four, of the SCF. Attach contribution and payment requirements for the new fund as explained in the SCF.
  • Unless you’re already a member of a company or public sector fund, you can only choose from three types of super funds: industry funds; retail funds or master trusts; or self-managed funds.

If the default fund your employer nominates on the SCF is NOT your existing fund, you have the following options:

1. Do nothing. If you’re happy with the new default fund, you don’t have to do anything. Your employer will start paying your compulsory contributions into that fund. However, before accepting your employer’s default fund, make sure it gives you what you want in terms of returns, fees, insurance and investment options. If you’re happy with it, consider closing other funds and rolling all your super savings into the one account to avoid paying multiple fees.

2. Choose to remain in your existing fund.

TRAP: if you don’t actively choose your existing fund, your employer’s contributions won’t continue to be paid into it. You will need to complete Part B, questions one and four on the SCF to keep your existing fund.

3. Choose another fund.

TRAP: in some circumstances your employer can still knock back the fund you choose. A fund may require your employer to enter a participation agreement before it will accept Super Guarantee payments. If your employer refuses, you’ll have to find another fund. We think this loophole in the new rules could make it very difficult for some employees to exercise their rights under super choice and may force them to accept the employer’s default fund even if it doesn't meet their needs.

If you decide to change funds (and your employer accepts the fund chosen) your employer must start making your compulsory SG payments to the new fund within two months of you returning your SCF.

Case study: farewell multiple funds

The big advantage of the new choice rules is that they should make super much more portable. Casual workers will be able to have a single fund rather than multiple funds to meet the needs of different employers. You shouldn't have to change funds every time you change jobs.

Mary is a casual worker who can’t wait for fund choice. She works in the ski industry and can have up to four jobs at a time in one season, and then does office temping outside the ski season. Each of her employers pays super contributions into different funds so Mary ends up with multiple accounts with small balances.

“No one ever talks about the consequences of casual work and the effect of multiple funds on the size of a casual (or part-time) worker’s retirement benefit,” explains Mary.

She has done her homework, however, and is fully aware of the impact of paying super fees more than once. She has combined her many funds and now has only three super fund accounts. She plans to have only one when fund choice arrives in July 2005 and she can finally choose the fund where her employers pay her Superannuation Guarantee.

04.How to find a new fund

 

The first step is to take a good hard look at your existing fund. You may discover it gives you a competitive deal.

Every super fund must give you a Product Disclosure Statement (PDS) before you join. In each PDS, you’ll find a summary page listing the fund’s main fees, the number of investment choices, insurance option costs and how the fund communicates with you. Obtain a PDS and read if carefully for each fund you’re considering, including your existing fund.

Important criteria to evaluate for your existing fund and any new fund you may be considering include:

  • Investment performance.More...
  • Investment options. More...
  • Fees. More...
  • Insurance. More...
  • Extra services, such as financial planning services and cheaper home loans.

Super is a long-term investment so don’t judge any fund on the basis of short-term performance figures. Table 1, below, will help you to ‘position’ your current fund’s performance and any others you’re evaluating.

Does each fund perform above or below average over at least three years for the particular investment option you’re considering?

Be sure to compare ‘crediting rates’ to ascertain a fund’s performance net of fees and taxes.

Use the Top Performers table to identify consistent performers over the long term across a range of investment options.

    Returns after all fees & taxes
Investment option 1 yr (%) 3 yrs (%pa) 5 yrs (%pa)
Growth Best 18.0 10.6 9.7
Average 13.4 4.5 4.0
Worst 2.2 -9.6 -0.2
Balanced Best 19.1 9.4 9.2
Average 11.3 5.1 4.7
Worst 3.2 1.4 2.0
Capital stable Best 13.5 7.6 7.3
Average 7.3 4.8 4.6
Worst 2.3 1.7 2.1
Capital guaranteed Best 9.7 5.4 6.0
Average 5.2 3.9 4.1
Worst 0.8 0.7 1.3
Australian equities Best 58.6 22.5 15.7
Average 23.6 9.3 8.2
Worst -5.9 -15.1 2.0
International equities Best 16.0 3.2 0.1
Average 5.9 -5.4 -7.4
Worst -4.6 -17.1 -22.4
Property Best 21.7 15.1 14.6
Average 15.2 11.3 11.7
Worst 6.9 5.9 8.0
Australian fixed interest Best 6.5 8.7 6.8
Average 3.7 4.6 4.4
Worst 0.5 1.5 1.7
Cash Best 5.1 4.9 5.0
Average 3.8 3.5 3.8
Worst 0.9 0.5 0.6
 

06.Investment options

 

It’s worth reviewing your super investment choices as part of reviewing your entire choice of fund. It’s critical to ensure your super contributions are invested in the right types of market for your financial needs and tolerance to investment risk.

When you join a fund you’ll have a range of investment options to choose from. While some ‘premium choice’ master trusts offer many options, some more than 200, most ‘value choice’ industry funds now offer at least three or four; larger industry funds offer around 10.

You can usually select from capital-guaranteed, capital-stable, balanced and growth options. Capital-guaranteed this option offers minimal risk but usually low returns. Growth options are high-risk but historically have higher long-term returns.

If you’re in a capital guaranteed option your money will be in low-risk investments — banks, building societies and other deposit taking institutions. Choosing a conservative investment option generally means a lower return than a more aggressive option. A riskier option may deliver higher returns but you can end up with a negative return too as the investment risk increases.

Around 80% of fund members have their super invested in the default option. It’s usually a balanced option, used when members don’t exercise investment choice. A balanced option normally has 70% or more of its assets in shares, property and alternative investments.

Everyone has their own tolerance to risk. If you have 30 years left in the workforce, you can obviously take more chances with your super savings and favour high-risk, growth investments like shares. If you have a few years of low or even negative returns there’s plenty of time to make up for those losses. You may want to consider more conservative options as you near retirement.

When to switch investment options

Most super funds allow their members to switch between investment options. This should be done with a high degree of caution. Small investors can often incur losses by attempting to follow market trends.

It’s sensible to review your investment options annually. Does it still match your risk profile and meet your financial needs? If the answer is ‘no’, consider making a switch or consult a professional financial planner.

Find out how many times a year you can switch without paying a fee. Some funds allow daily switching, but this is likely to come at an additional cost. Do you really need this option? You could be paying for a service you’ll never use.

It’s estimated that around 80% of super fund members don’t exercise their investment choice at all, instead leaving their money in their fund’s default option, typically a balanced strategy.

Again, this can be a problem if your fund has many investment options — you may be paying higher fees for unused options.

A reasonable motivation for changing super funds is when the fees you pay in your existing fund are significantly higher than other super funds; and you’re not getting anything extra for the higher fees.

Nearly 70% of fund members are in funds with reasonable fees. Not-for-profit funds such as industry, corporate and public sector funds usually charge the lowest fees because they don’t have to factor in a profit to be paid to shareholders. Also, they usually don’t pay commissions to financial planners.

Retail funds charge the highest fees because they cover any financial advice you may receive, and the organisation running the fund has to make a profit. If you’re planning to leave a retail fund, watch out for any exit fees you may have to pay.

Some super funds run for profit are known as wholesale funds, and the fees on these types of funds can be reasonable but you can’t usually join them as an individual.

Comparing fees is a minefield. Depending on your fund, similar fees have different names. They may be itemised or grouped, similar services may be charged differently and fees may be taken from the overall fund or from your individual account balance.

Some not-for-profit funds call charges such as investment fees ‘costs’ as they’re taken from the overall fund instead of each member’s account. This means they’re not even listed in a fund’s fee disclosure.

Under the Financial Services Reform Act (FSRA) financial service providers must give all potential customers a product disclosure statement (PDS), detailing any fees, what they’re for and who they go to — particularly if they include commissions for financial planners. Our PDS checklist will help you wade through the information in your fund’s PDS.

Knowing your fund charges a certain percentage of its earnings in fees is not enough; you need to know how those fees affect your final account balance. A 1% ongoing management fee might not sound like much, but over 30 years it adds up to a large chunk of your nest egg — you’ll lose $100 for every $10,000 in your account every single year.

1. Super calculator
How much annual income can you realistically expect from your super? Use a super calculator to find out, such as the one at FIDO website.

2. Super fund report cards
For a limited time members will have discounted access to SelectingSuper’s comparative super fund report cards for $99 instead of $169. Go to www.selectingsuper.com.au for more information.

PDS checklist

Use our guide to understanding the essential elements of a super product disclosure statement.

All super funds have to give prospective members a PDS to help them make informed choices.

Use the PDS of each fund you consider to look out for information on:

  • Investment options – These are the broad investment categories a fund invests in. They include capital-guaranteed, capital-stable, balanced and growth. They vary in their asset mix (cash, bonds, international shares, property, Australian shares and so on) and risk. Check how many you can choose from and the investment strategy and risk level of each option’s investment mix. Your statement should tell you what proportion you have invested in different assets.
  • Past performance – Although past performance does not indicate future results, you need to know if you’ve got a lemon. Check returns over the last five years and compare with similar options from different funds. Do some research – find out how well investment markets have performed in that period.
  • Fees – Check whether fees are shown before or after tax. If shown after tax is taken out they’ll appear 15% cheaper than they actually are (a $100 fee will appear as only $85 if shown net of tax).
  • A worked example of fees – A good PDS should provide a worked example of fees in dollar terms. Use this to calculate the impact of fees on your own account by substituting your own balance and fee details.
  • Taxes you will have to pay – Taxes are the same across funds. You will be taxed on contributions, earnings and payouts.
  • Insurance options – You may have the option of death, “permanent or total disability” or income protection cover. Find out what’s on offer and how much it costs. Super insurance offers are often more affordable than regular insurance products and you can pay for them out of your contributions.
  • The mechanics – Your fund should let you know how to open or close an account, switch investment options, how to receive payouts and any contact details you might need.
  • General fund information – The number of members, where its investments are, the level of assets held and fund size.

If you join an industry fund or a fund via your employer, you often get a great price on insurance and you usually don’t have to take a medical to get basic cover. The cover you receive under this arrangement is basically a package deal for all members. If you join a super fund as an individual you may not be able to access such competitive wholesale rates for insurance. You may even be rejected for insurance cover if you have a pre-existing health condition.

The table below shows the super funds with the best value wholesale insurance deals. It shows how much death only cover you'll receive for each $1 of premium you pay per week.

Super funds with the best value wholesale insurance deals*
Death only insurance Cover ($) (a)
Queensland Independent Education and Care Superannuation Trust 116667
TASPLAN 93750
Non-Government Schools Superannuation Fund 91250
CUE (Credit Union Employees) Super Plan 83871
Catholic Superannuation and Retirement Fund 77414
Law Employees Superannuation Fund 77345
Finsuper 76667
Mercer Super Trust (Corporate Super Division) 73239
Superannuation Trust of Australia 71512
CARE Super 70680
 

Table notes

* Insurance deals for a 45-year-old from a low occupational risk group, eg managerial.
(a) This is the amount of cover you can purchase for each $1 of premium you pay per week.

09.Where to go for advice

 

Financial planners deserve to be paid for the advice they provide but you have to decide how you want them to be paid, and whether you want to pay for independent advice or advice which may be affected by conflicts of interest. A planner who receives commissions, rather than a fixed fee is representing the super fund as well as advising you. Some advisers offer many versions of retail funds and give you no other fund options.

Retail super funds include a fee that’s effectively a trailing commission paid to your planner for ongoing advice, for as long as you’re in the fund. If you join a retail fund make sure you get your money’s worth and avail yourself of this ongoing advice.

TIP: your existing super fund may provide a financial planning service for a cost-effective price but be sure they can provide advice on all types of super funds and not just products relating to your existing fund.

For more information about super choice and pointers on how to select a financial planner, use the following sources:

  • Call 132 864 to download a copy of the Commonwealth Government's Super Choices booklet.
  • For questions about early release of super, if your employer isn’t forwarding contributions to your fund, or if you believe your fund is being mismanaged, contact the Australian Prudential Regulation Authority (APRA) or call 1300 131 060.
  • For missing or incorrect Super Guarantee contributions, lost accounts, tax rules and self-managed super funds, contact the Australian Taxation Office (ATO) or call 13 10 20.
  • If you have a complaint and can’t resolve it with your fund, the Superannuation Complaints Tribunal may be able to help or call 1300 884 114.
  • Contact the National Information Centre on Retirement Investments (NICRI) for free super information or call 1800 020 110.
  • For online fact sheets and super calculators, visit the Association of Superannuation Funds of Australia’s website or call 1800 812 798. For a range of information to help you understand your super, visit ASIC’s consumer website or SelectingSuper.
  • The Australian Investors’ Association is an independent, non-profit association for individual investors. Call 1300 555 061 or visit the AIA website for details of their free 3-month trial subscription.

10.Super choice traps

 

We think there are some pitfalls for consumers in the new choice of fund rules.

TRAP 1: Be wary of self-managed super

Is self-managed super really such a good move for you? Even if you have the $200,000 or more in your account that will justify the set-up and ongoing costs of a self-managed fund, do you have the time and the commitment to run your own fund?

Consider whether you can beat the returns delivered by the bigger funds. Insurance cover may cost a lot more via a self-managed fund, or you may not be able to get cover. See our article and use our DIY super quiz to test whether self-managed super is an appropriate option in your situation.

TRAP 2: Avoid retirement savings accounts

A Retirement Savings Account (RSA) is a low-risk and low-return super account provided by banks and other financial organisations. RSAs are not a long-term investment option but a parking vehicle until a person accumulates a large account balance or gets around to consolidating super accounts.

Employers are permitted to choose an RSA as a default fund so be careful you don’t end up in an RSA by inaction. In most cases, as a member of an RSA, you won’t have any insurance cover.

TRAP 3: If your employer chooses a new default fund

Don't accept your employer's choice of default fund without properly investigating that it's the best choice for you. Compare it with your existing fund. If you existing fund has lower fees, for example, it may be worth staying put. You'll have to actively choose your existing fund on the Standard Choice Form to make that happen. If you don't actively choose your existing fund or an alternative your employer's Super Guarantee payments will be diverted to the default fund they choose. We know the funds management industry is actively marketing master funds to employers so be wary of default funds with high fees and expensive insurance cover. Make sure you shop around.

TRAP 4: If your employer doesn't like your choice

In some circumstances your employer can knock back the fund you choose. A fund may require your employer to enter a participation agreement before it will accept Super Guarantee payments. If your employer refuses, you'll have to find another fund. We think this loophole in the new rules could make it very difficult for some employees to exercise their rights under super choice and may force them to accept the employer's default fund even if they don't think it meets their needs.

TRAP 5: Don't get pushed into retail

We're worried super choice will push more investors into paying expensive 'retail' fees when they don't need to. For instance, if you change jobs you may be forced to change super funds. If your employer has negotiated a 'wholesale' fee deal with a master trust, you may not be able to stay in the 'wholesale' part of that master trust if you move to another employer, which has a different default fund. Make sure you don't get pushed into the retail part of your original master trust if you elect to keep it as your fund of choice. Your new employer's default fund or a new fund altogether may be a better option.

11.Checklist - employer obligations and your super toolkit

 

Checklist

Those employers who are legally required to offer fund choice have many obligations under the new fund choice rules.

They must:

  • Choose a default fund with some life insurance cover, for those who fail to exercise fund choice.
  • Give each eligible employee a Standard Choice Form (SCF) by 29 July 2005 unless the employer is informed of an employee’s fund choice in writing before 29 July 2005.
  • Make the choice happen within two months of the employee returning their SCF.
  • Give employees the option, on request, to change super funds once a year. If you change jobs after July 2005, any new employer must give you a Standard Choice Form within 28 days of you starting your new job, unless you inform your employer of your fund choice in writing before the 28 day period ends.

Your employer can knock back the choice you have made. Your chosen fund may be unable to accept your employer’s contributions unless your boss becomes a participating employer.

If this happens, there are three options:

  • Your boss may decide to become a participating employer. Your boss must sign a form that creates a contractual arrangement with the chosen fund’s trustee, and requires your boss to pay super contributions every quarter or every month, depending on fund requirements.
  • You find another fund that your employer is happy with; or
  • You end up in your employer’s default fund.

Your super toolkit

Use the following tools to ensure you make the best choices with your super.

1. Fees calculator
Use this calculator to work out how much you’re paying in fees in both dollar and percentage terms. The calculations are based on SelectingSuper's Total Expense Ratio (TER). Go to our fees calculator to determine your fees.

2. Super fund report cards
For a limited time members will have discounted access to SelectingSuper’s comparative super fund report cards for $99 instead of $169. Go to www.selectingsuper.com.au for more information.

3. Performance tables
The table will help you to position your existing fund and any others you're considering against the lowest, highest and average performer in the particular investment option you're looking at.

  • Corporate or company fund: available to people who work for a particular employer. May be run by the company or through a fund manager or master trust. Some master trusts provide wholesale deals to employers. If you change employers and want to stay with your existing fund, you may have to switch to the retail fund with higher fees.
  • Industry fund: available if you work within a certain industry or under a certain industrial award. Some are open to the general public.
  • Retail fund or retail master trust: open to members of the public and run by financial institutions.
  • Retirement Savings Account: a low-risk, low-return super account provided by banks and other financial organisations. RSAs are not long term investment options but a parking vehicle until a person accumulated a large account balance or gets around to consolidating super accounts. Employers are permitted to choose an RSA as a default fund so be careful you don't end up in an RSA by inaction. In most cases, as a member of an RSA, you won't have any insurance cover.
  • Self-managed Superannuation Fund: regulated by the Australian Taxation Office. Can have up to four members and each member is a trustee.
  • Wholesale fund: offered by fund managers to employers, usually with lower fees than retail master trusts.