Need to know
- APRA has developed analytics to map the performance of super funds and products
- The most recent APRA heatmaps showed widespread poor performance and high fees among Choice super funds and products
- Super Consumers Australia recommends you make sure you're getting good value if you choose to join one of these products
The difference between Choice super and MySuper
In Australia's super system, there are two options. You can go with a fund chosen for you by your employer, or you can choose your own.
Default products (known as MySuper products) are those chosen by your employer, while non-default products, known as 'Choice' super products are those that you choose yourself.
If you don't make an active decision about where to put your super, you will be placed in the fund your employer nominates.
But, when choosing your own fund, your options are not limited to Choice super products. You may wish to join or switch to one of the MySuper products available.
The Australian Taxation Office (ATO) describes MySuper products as "basic superannuation accounts without unnecessary features and fees".
What is a Choice super fund?
Choice super products are funds that you can't be defaulted into – you need to actively make a decision to join one.
This type of super product may offer a wider suite of investment options, and other features such as greater website functionality.
Whether a MySuper or a Choice product is better for you depends on your needs, goals and level of engagement with your super.
Super funds can offer many different Choice super products, but only one MySuper product.
The performance of Choice super products
To compare the performance of each super option, APRA (the Australian Prudential Regulation Authority) has developed benchmarks that take into account investment strategy and level of risk and allow a 'like-for-like' evaluation.
The results are presented in colour-coded heatmaps that show a super fund's fees and investment returns.
The most recent APRA heatmaps included Choice super products for the first time, and what this new data showed wasn't pretty for the Choice super sector
APRA says these maps are "designed to lift industry practices and enhance member outcomes by publicly identifying which … products are underperforming and the areas they need to improve".
The most recent APRA heatmaps included some Choice super products for the first time. And what this new data showed wasn't pretty for the Choice super sector:
- More than 60% of Choice investment options fell short of APRA's benchmarks over a seven-year period.
- 25% had "significantly poor returns" for their members.
APRA also reported significantly more performance variance across the Choice sector than the MySuper sector.
Our analysis of Choice super fund performance
Analysis by Super Consumers Australia found that a member with a $50,000 balance in an underperforming Choice product would be $7659 (or 9%) worse off than a member in an outperforming product over a seven-year period.
Fees in Choice super products
"Fees and costs in Choice products are considerably higher than MySuper products, without obvious benefit in financial outcomes to members," APRA reported when the heatmaps were released.
High fees in this sector have been a problem for some time. In 2019, The Productivity Commission reported there were around four million members in high-fee super products. "Almost all" of these accounts were in Choice products.
APRA noted common features in the Choice products included enhanced member reporting and website functionality and flexibility to invest in a wider range of securities.
If funds include any premium services, they should be able to show how these services add to better financial outcomes for fund members
The regulator explained, however, that it expects super funds to show that fees are fair and aligned with the fund's duty to put its members best financial interests first. If funds include any premium services, they should be able to show how these services add to better financial outcomes for fund members.
The regulator also raised the issue of scale. This can be important, with larger funds generally able to operate with lower costs per member.
Remember, however, that some funds buck this trend – the most relevant cost to you is that charged by your particular fund.
Do you need additional features?
Super Consumers Australia policy manager Franco Morelli says anyone in a Choice super fund or thinking of joining one needs to weigh up whether these additional features add value.
Another possible reason fees could be higher in Choice products is because they may use active management. This style of managing funds is more labour-intensive than passive management. It also tends to cost more.
But analysis, shows that few active managers can beat the market and achieve better long-term returns than passive management.
Higher fees eat into your retirement income ... active management tends to come with higher feesFranco Morelli, Super Consumers Australia
"It might be nice to have features like more website functionality, but you have to keep in mind that higher fees eat into your retirement income," says Morelli. "Similarly, active management tends to come with higher fees.
"If you're paying more for this type of fund management, or these extra features, make sure this is something that you're actually getting value out of."
For many people, the range of freely available retirement planning tools and information may be sufficient.
Dud Choice super products
Another alarming statistic revealed by the heatmaps was that more than a quarter of Choice super product options had a double whammy of high investment fees with below median returns.
The expert advice around choosing a super product is to look at both fees and long-term performance, as failure in either of these areas will see you retire with less.
Heatmaps driving improvement
While the heatmaps provide new information about the Choice super sector as a whole, the most important thing is the focus on fees and the long-term performance of the product you're in or are thinking of joining. Some individual Choice products buck the trend by performing well and or offering good value fees.
The heatmaps are aimed more at the funds themselves than fund members. There is evidence their approach of highlighting underperformance is working.
Further, it's important to note that the heatmaps don't cover all Choice super products at present. APRA has plans to extend its coverage in coming years.
Morelli says this is a positive step: "We know that among the high-fee products in the MySuper sector, fees have fallen significantly since the introduction of the heatmaps. The greater transparency has benefitted members." Similarly, the ATO's super comparison tool currently only allows you to compare MySuper products. Super Consumers Australia says it should be extended to include Choice super products.
"The fund comparison tool has allowed MySuper members to quickly and easily compare funds on performance and fees, and extending this to Choice products will help more people find high-performing products to build up their retirement income," says Morelli.
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.
Stock images: Getty, unless otherwise stated.