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Superannuation is a long-term investment but that doesn’t mean you can afford to put off thinking about it for a day that never comes.
Like any long-distance journey, you want to make sure you know where you are headed and how to reach it. That includes finding a vehicle that’s fit for purpose. Otherwise, you could end up short of funds to enjoy your destination – in this case, retirement.
Whether you are choosing your first super fund, consolidating several funds into one, or wanting to switch to something better, it pays to invest some time in thinking about what you need in a fund and then comparing what’s on offer.
Most people these days can choose their fund, unless you happen to be an employee in a defined benefit fund or covered by an industrial agreement. You may be lucky and end up in a high-performing default fund, but unless you verify that this is the case what you don’t know could be very costly.
The following 7 steps are designed to guide you through the process of comparing and choosing a fund that will get you where you want to go.
Before you start comparing the market for any major purchase, be it a car or a super fund, it’s important to think about what you want. Otherwise you could end up paying for expensive extras you don’t need.
A fund with a wide range of investment options and scope for active management and individual tailoring will generally charge higher fees. Australian Expatriate Superannuation Fund is designed for members who want a hands-off, easy to understand, no-frills fund with low fees. Personal super products are designed with the self-employed or self-directed in mind while retirees drawing down their super need a pension account.
An increasing number of Australians, particularly younger members, want the ability to choose a sustainable or socially responsible, or a fund that takes ESG (environmental, social and governance) issues into account in all investment decisions.
Your time horizon and appetite for risk is also a factor. Younger members can afford to take on more risk so a high growth option with a good track record is important. Or you may be interested in fund with a life-stage or life-cycle option which automatically adjust your asset allocation, or the mix of high- and low-risk investments, as you age. If you are near the end of your working life or already retired, you will want a fund with a highly rated pension account.
It’s not all about investments and returns. Do you want a fund with a good insurance offering, the ability to monitor and transact from your mobile, free advice or the ability to make a binding death benefit nomination? The latter provided more certainty over who inherits your super when you die.
If you are already in a fund, check its website or annual reports so you know what it does and doesn’t offer. Also check its investment performance over 3, 5, 7 and 10 years as well as its fee structure. Then go online to research and compare other funds on offer.
The three most established comparison websites are Chant West, Selecting Super and Super Ratings. All produce annual performance tables and fund ratings as well as educational material.
Most of this material is free, but Chant West and Selecting Super charge for a more detailed comparison of two or three funds. The ratings methodology of each group is slightly different, but they all use a combination of factors including returns, fees, insurance offerings and member services.
Most super funds these days offer an extensive a la carte menu of investment choices. You can mix and match your own portfolio of shares, property, fixed interest, cash and other assets, or choose from a selection of pre-mixed investment options.
‘Conservative’ pre-mixed options contain mostly lower-risk defensive assets such as bonds, cash and fixed interest investments. ‘Growth’ options hold mostly higher-risk shares and property, and ‘Balanced’ options are more equally weighted between the two. In practice though, Balanced options can hold up to 70 per cent growth assets, so drill down and check the asset allocation.
For those who want more control but may not have the account balance or inclination to run their own SMSF, many funds now allow you to buy and sell direct shares and exchange-traded funds.
Past performance is so guarantee of future returns, but you can have more confidence in a fund with a track record of above average returns over at least five years.
You will also notice that short-term fluctuations from one year to the next tend to even out in the long run. This is particularly evident with high growth options, which invest mostly in shares, whereas conservative options produce steadier, lower returns over time.
If the thought of losing a sizeable chunk of your fund’s value in a single year makes you anxious, then a more conservative investment option might help you sleep easier at night.
When checking performance, make sure to compare like with like. For example, compare high growth options with other high growth options and life-stage options with other life-stage options. This is especially important when comparing balanced funds because the tilt towards growth assets can vary enormously.
Small differences in fees can add up to a big dent in returns over the life of your super. The amount of money available to you in retirement will depend on your investment returns less fees and tax. It’s not uncommon for people to spend a great deal of time trying to minimise tax, while fees fly under the radar.
Superannuation funds are required to disclose their total fees and charges in their Product Disclosure Statement (PDS) and your annual statement. These include an administration fee to cover the costs of managing the fund and your account, investment fees to cover the cost of managing your investments and performance fees where applicable. While exit fees are pretty much a thing of the past, do check if there is a fee for advice and if you are getting what you pay for.
There are plenty of low-cost funds with total annual fees of less than 1% of your account balance, but fees should never be looked at in isolation. Funds with a lot of money in property and private equity, for example, tend to have higher costs than funds with mostly cash and bonds. The trade-off for higher risk and costs ought to be higher returns in the long run, but don’t assume this is the case, check it out.
Taking out insurance cover inside your super fund can be very cost effective because funds are able to negotiate group rates. Many funds offer life insurance, total and permanent disability (TPD) and income protection at competitive rates.
Do be aware though that insurance premiums inside super are paid from your account, so there is less money earning a return. This may be a price you are willing to pay if you don’t have enough free cash flow to pay premiums outside super.
For some people with a SMSF, the attraction of low-cost insurance is enough to justify keeping a small amount of money in an industry fund on the side. However, default cover in super is generally limited, so you may need to top up your cover. It can be slower to pay and unless you have a binding nomination your chosen beneficiaries may not receive your insurance death benefits.
Many employees in public offer funds will have default insurance cover. However, changes announced in the 2018 Federal Budget, due to be introduced on 1 July 2019, will make insurance opt-in for members under 25 and members with low balances or inactive account. As a result, premiums are expected to rise for members with insurance.
Changes to default cover make this an opportune time to check the type, level and cost of insurance you hold in super and compare what’s on offer elsewhere. You can find this information on your annual statement and funds’ websites.
Once you’ve identified some promising funds, it’s time to probe deeper. Check their website, download their PDS and phone or use online chat to ask questions. Even if you don’t have questions, chatting will give you an insight into their customer service.
At this stage you might also want to check for other services and benefits that are important to you. Some may want a fund that offers free financial advice, educational tools and member information seminars. Others may want cheap insurance, the ability to make a binding death benefit nomination or a seamless transition from accumulation to pension phase.
If you decide to change funds, you can do this by filling in a rollover form and sending it to you new fund or by logging in to your MyGov account.