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.