Many people tune out when it comes to the subject of superannuation, and that's understandable – but not necessarily smart! After all, it's your retirement nest egg we're talking about.
Sure, it's a financial thing, and that means confusing language and TMI (too much information) in spades. But there are a few simple points to bear in mind when considering your super. The main one is not to place blind trust in your fund manager – especially since you probably didn't pick the fund in the first place.
The power to choose
At last count, about 70% of Australian employees let their employer choose their super fund. Some employers all but force you to use their chosen account – especially if you're a contractor. (For the record, they can't do that. You always have the right to choose your super account.)
Unless you stay in the same job all your life, you can end up with little bits of your precious nest egg spread across multiple accounts, all of which charge fees of varying amounts.
Funds chosen by employers are known as default accounts. They usually have the highest fees and least fee transparency. Leave your super in this state and that cruisy retirement dream can drift away pretty quickly.
The fee factor
Super fund managers love it when you don't bother to check on how much they're draining from your account in annual fees.
- When we last checked in 2014, annual superannuation fees ranged from as little as $300 to as much as $1245 on a $50,000 account – all for "services" you may not have asked for and might not need.
- If your super account reaches $200,000, the fee gap widens considerably – $1200 versus $4980 per year. In percentage terms, the range is about 0.6% 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. There's only one term for it – highway robbery!
Making sure you're not being overcharged can make a massive difference in your long-term financial health. So while your eyes may glaze over at the mention of the word superannuation, you would probably wake up in a hurry if you understood the damage being done to your super account though excessive fees.
The solution? Ask your super fund for a fee schedule and a clear explanation of exactly what you're paying for.
After fees, it's logical that super fund performance would be your next point of interest. But it's worth pointing out that solid performance and high fees can yield the same results as lacklustre performance and low fees, so the two factors need to be considered together.
Australia – #notwinning at super
Sadly, Australia's super fund managers are less than world-class – either that or they're just not trying very hard.
There was plenty of evidence of this in the lead-up to the global financial crisis (GFC), when many funds were over-exposed to the share markets. For many retirees or near retirees – people who didn't have time to get their accounts back to where they were before the crisis – the impact was devastating.
The S&P ASX 200 fell 40% between March 2008 and March 2009, and 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.
A set-and-forget approach generally means poor planning. Don't get us wrong – we think super is a great system when it works as intended. But there's clearly room for improvements - and getting involved is the best way to change the system.
How to shop for a fund
Super fund performance varies over time across the industry, so there is no 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, 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.
In a nutshell, the goal is to find a fund with good returns and low fees, and to make sure you're not paying for something you don't need.
Super comparison websites such as Canstar Cannex and SelectingSuper can help you compare funds. This kind of site uses different rating methods – so it's not always apples with apples. Use them for research, not decision-making.