Superannuation buying guide
Super is tricky, but a little knowledge can go a long way.
It's your money after all ...
You can do this thing!
You can be forgiven for tuning out when the subject of superannuation comes up.
But tuning in on a regular basis is probably not as painful as you think – and a bit of attention to the matter can do wonders for your retirement savings.
Blind trust in your super fund manager is never a good financial strategy.
Going along for the ride
At last count, about 70% of Australian employees let their employer choose their super fund for them, probably because the same percentage of Australians don't quite know what that decision, or non-decision, might mean.
First off, it means your money will end up going into what's known as a default account.
(On a side note, lack of useful information is the main reason Australians fail to engage with the superannuation system, as a 2016 CHOICE research project confirmed. Could super funds and the super industry as a whole do a better job of communicating with account holders? Yes.)
Some employers all but force you to go with the super fund favoured by the company – especially if you're a contractor – probably because it's easier for them admin-wise or the super fund incentivises them to sign up as many employees as possible.
When it comes to picking a default account from a list an employer puts in front of them, research shows that employees take about five minutes to make the decision.
For the record, you nearly always have the right to choose your own super fund. (The only exceptions are industrial agreements and defined benefit funds. If you're in one of the latter it's probably good to stay put as these types of funds can have many advantages, not least a guaranteed amount of money once you become eligible for payouts.)
What you don't want to do is end up with little bits of money spread across multiple accounts, all of which will charge a variety of fees as well as, in many cases, premiums for risk packages that generally include life insurance, total and permanent disability (TPD), and income protection insurance, areas where premiums are on the rise.
Do yourself a favour and avoid multiple accounts – it just doesn't make good financial sense. And it's easier than ever these days to consolidate your super.
But think twice before dumping a super account with insurance offerings you won't be able to get with a different fund.
Retail vs Industry funds
There's a long-running feud between the retail and industry super fund sectors, with both claiming to deliver higher returns. Often this is a matter of self-serving analysis, but at any rate such claims shouldn't be a decisive factor in choosing one or the other. There are some important differences between the two, though.
Retail funds are for-profit operations open to anyone and generally recommended by financial advisers, who may stand to gain if you join (though adviser commissions are being phased out). They generally have higher fees than industry funds, though MySuper options in retail funds will have lower fees. They tend to have more investment options than industry funds – a mind-boggling array for most people.
Industry funds are also open to most people, though some are restricted to certain industries. They generally have lower fees and are nonprofit, meaning any profits are returned to the fund to benefit its members.
The MySuper option
In an effort to the reduce the high fees and low transparency that had long characterised default super accounts, the government introduced the MySuper initiative in 2013.
If you already had a default super account before 1 January 2014, your fund will be required in most cases to move your money to a MySuper option by 1 July 2017.
If you started a new job after 1 January 2014 and didn't choose your fund, your employer would have been required to direct your contributions into the MySuper option offered by their choice of fund.
Among other things, MySuper accounts are meant to have lower fees and simpler fee structures, be easier to compare from fund to fund, and offer greater transparency of both fees and account performance along with what's actually in the account.
They also come with life insurance, which you can opt out of if you don't need it.
So far, the MySuper rollout has seen fees decline across the industry, a good thing for the seven out of ten employees who stand to be affected.
MySuper is an improvement over the previous state of affairs with default accounts, but it shouldn't serve as an excuse to ignore your super account.
Super funds that screen out things like fossil fuels and weapons-makers are increasingly giving non-ethical funds a run for their money. If you're ethically minded, an ethical super fund can be a sound choice.
The fee factor
Fees have long been a vexed issue in the super realm, and lowering fees is one of the main aims of the government's MySuper initiative.
- When we last checked, annual superannuation fees ranged from as little as $300 to as much as $1245 a year on a $50,000 account – all for inclusions you might not need outside of management and admin fees, such as life insurance if you're young and just starting your career.
- If your super account reaches $200,000, the fee gap widens considerably – about $1200 versus $4980 per year. In percentage terms, the range is about 0.2% to 2.49% of your account balance annually.
- In case you didn't know, no fund manager is helping to grow your super account enough to justify a 2.49% fee.
Making sure you're not being overcharged can make a massive difference in your long-term financial health.
In one hypothetical case study outlined by ASIC, a 30-year-old woman who switched from a super fund charging 2.5% in fees to one charging 1% stood to come out $81,000 richer by the time she was 65.
That said, low fees alone won't mean you'll have the biggest nest egg in the end. Some low fee super fund accounts are passively managed, meaning the fund takes a set-and-forget approach and hopes your account does as well as the overall market in the long run.
It's generally worth paying a little extra to have an actively managed account so your account manager can make any necessary adjustments along the way, but make sure you're not paying too much.
The solution? Ask your super fund for a fee schedule and a clear explanation of exactly what you're paying for.
How is my money invested?
The majority of Australian superannuation account holders have their money invested in what's known as "balanced option" accounts. The idea is to balance risk with returns and have a mix of shares, property and other investments such as fixed-interest and cash.
Generally, it's about 70% in shares and property and the rest in fixed-interest and cash with balanced accounts – and that's a pretty sound long-term strategy (barring major share market upheavals) for most people.
But it's worth noting that this investment strategy may not be appropriate for your entire working life, especially as you approach retirement.
Most MySuper accounts offer life-stage options which align portfolio allocation with your age and how close you are to retirement.
Then again, life-stage accounts tend to have higher fees, and you could achieve the same effect by picking a different account option – and reducing risk as appropriate – as you age.
In any event, it's worth knowing how your retirement money is invested and whether the risk profile is appropriate to your life stage or other circumstances.
Over-exposure to the share market during the global financial crisis of 2008, for instance, had a devastating effect on near-retirees who didn't have enough years left in their working lives to make up the losses.
Other investment options include:
Growth – Riskier than balanced and not for the faint-hearted. Anywhere from 85% up to 100% is invested in shares and property, leaving account holders particularly vulnerable to sharp market fluctuations. Of course, if the risk pays off, you end up with more money in the end.
Conservative – With only around 30% in shares and property and the rest in less volatile investments, you're protected from most market downturns, but the tradeoff is significantly less growth in your super account.
Cash - About as safe as you can get and still stay in the financial system as we know it. Your investments and the amount they will earn will be locked in, but the returns will likely be far less than what shares and property can deliver.
In all cases, have a close look at how much of your account is invested in shares and property (the riskier stuff) versus fixed-interest and cash.
Generally, the growth opportunities offered by balanced option accounts – mainly through shares and property – are a good move for employees in the accumulation phase of their retirement savings, as these types of investments have historically delivered higher returns in the long run.
If you have questions, talk to your super fund.You have the power to change how your money is invested!
Show me some performance
Super fund performance is a function of fees as well as account management. Solid performance wiped out by high fees can leave you in the same place as lacklustre performance cushioned by lower fees.
And, of course, performance is always heavily dependent on how the financial system is travelling as a whole, as many found out during the global financial crisis.
That said, there is evidence to suggest that some of Australia's super fund managers aren't the sort of financial savants you would hope would be managing your money. Or perhaps some just aren't trying very hard.
Once again, the worldwide financial crisis is a case in point. The S&P ASX 200 fell 40% between March 2008 and March 2009, and many super accounts took a similar nose dive. Australian super funds were the third-worst performing retirement funds among the more than 30 OECD countries from 2008 to 2010 – only Portugal and Estonia did worse.
Super fund performance has been on the way up since then, but it's worth checking your account regularly to make sure the fund managers are doing their jobs.
How to shop for a fund
Super fund performance varies over time across the industry, so there is no single best way to find the fund that will make the most of your contributions. But there are some guidelines you should follow.
- Look for good performance over a five-year period rather than exceptional performance for just a year or so. Superannuation is a long-term investment.
- Be sure to factor in taxes and fees when checking performance figures.
- You should only compare funds with similar investment strategies, or those with roughly the same mix of shares, property, fixed interest and cash.
- If you feel the need, talk to a trusted financial adviser – preferably one who has no commercial connection to any of the funds they recommend. Only agree to pay them on a one-off, fee-for-service basis.
- It's generally a good idea to do a little research rather than just going with whichever fund your employer happens to be with. It may be a perfectly good fund, but it's good to double check before becoming one of the 70% or so of Australians who let their employers choose their funds.
- If you already have a super fund you're happy with, take it with you to your new employer. Having more than one fund rarely makes sense and can really cost you in the long run.
In a nutshell, the goal is to find a fund with good long-term returns after fees are taken into account, and to make sure you're not paying for something you don't need.
Doing the research
There are a number of website-based firms that compare superannuation funds, but they all use slightly different methodologies and their findings shouldn't be taken as the final word.
What such websites can do is give you a sense of which funds are consistently high performers, though they may not be the top-rated fund on a given website at the moment or on more than one website.
When visiting such sites for research purposes, the first thing to do is read their explanations of how they rate funds. Some concentrate on fees, for instance, while others look mostly at performance.
Only one of the sites listed below, Chant West, rates performance before fees are deducted. The rest subtract fees from returns as a basis for rating.
What you will quickly discover with such websites is the endless number of super options out there, making comparisons that much more difficult.
But at the very least you can take a look at how your fund is doing (if you have one) in comparison to other funds – or use the sites' rating systems to find consistently strong performers from site to site.
Examples of super comparison sites: