How to choose super fund
How to choose super fund
Let’s be honest, what we all really want from our superannuation/pension fund is:
- lowest charges,
- best returns with minimum risk,
- super fund that looks after your interest as members,
- and provides you with a free advice.
Sorry to disappoint you, but none of the super funds will do that for you.
So, unfortunately as with anything else in life, to make a good choice, you need to do a bit of work and research. But I am here to help you and give you some suggestions how to make this process easier.
But first, let’s start with the most important information about superannuation in Australia, which I can see is still a confusion:
From 1st January 2021 the super choice law was extended giving more Australians ability to choose their own superannuation fund – so you are no longer locked into your employer’s super fund.
So every employer needs to offer their employees a choice of fund, Here is the link to the Tax Office page where you can find more information.
There are lots of videos and articles you can find that give information about “the best super fund”, but mainly what I see is the advice to choose your fund based on level of fees or as the government advertises – based on performance.
As important as those are, there is no such thing as the best super fund.
There are over 500 superannuation funds in Australia and thousands of different investment choices. Choosing one can feel like a daunting task.
Choosing the super fund that will best suit your needs, as I said is complex, and requires a bit of work on your part.
So, I will go over the steps that I take when choosing and recommending a fund for my clients.
What types of super funds can you choose from and how they differ?
- Retail funds – These are funds run by financial institutions. They are generally open to anyone. They are regarded as more expensive type, but due to ongoing market competition, their pricing have come down considerably and they tend to provide very good investment choices.
- Industry Super Funds – These funds are generally designed for people who work in a particular industry, but some industry funds will allow anyone to join, but just because your employer provides you with this option, does not mean you have to accept it, you can choose your own fund. There is an inherent believe that they are “cheep” funds, but the truth is that as the market matured, and with great deal of corporate competition, Industry Funds had to include many investment options to stay in competition, with pricing now being similar to those of retail funds in a lot of cases.
- Public sector funds – These funds are generally only open to government employees.
- Corporate funds – These funds are usually only available to employees working for a specific employer. If your employer provides you this option, you can either take it or request your own. They tend to be more expensive than other funds, but they do provide a great deal of investment choices and often an incredible insurance package available to employees with no medical check requirement.
- Self-managed super funds (SMSFs) – These are funds where you have more responsibility in terms of administration, compliance and investment decisions. SMSF is very complex and outside of the scope of our discussion here, but if you decide to have your own SMSF you can request your employer to make all Superannuation Guarantee Contributions (SGC) as well as your Salary Sacrifice Contributions to your fund. It is a super fund like any other and it is your choice.
Your employer will likely provide you with a Superannuation Standard Choice Form when you commence your employment with them. Alternatively, you can download this form from the Australian Taxation Office’s website.
What should you look for in a super fund or a pension fund?
1. Good selection of investment options
Let’s be honest, the selection you make in your investments, asset allocation and fund managers will be the biggest determinator of the investment performance and return of your fund.
The name Balanced option, or Growth fund or Conservative fund does not mean the same investment mix of assets when comparing superannuation funds. Each can have a completely different asset allocation, with different exposure to different industries and ultimately provide different investment outcomes and returns,
I can tell you one little secret – no financial planner will ever use default funds such as conservative, balanced or growth portfolios. Why?
- They often are a more expensive investment option and
- you have no control where your money is invested.
A balanced fund from one super fund does not have to equal a balanced fund of another super fund (that goes for all different asset allocation).
As you know a good portfolio is a mix of growth and defensive assets, for example the range of investment into:
- Australian Shares, International Shares, Property – are growth assets,
- Australian Bonds & Fixed Interest, International Bonds & Fixed Interest and Cash are defensive assets or income producing assets,
- and then you might have some alternative assets as well.
The problem is that still, there is no industry standard to say what the defensive, conservative, balanced, or growth fund is, It is up to your super fund trustee to decide.
So, if they differ between super funds greatly, how can you compare them?
It is like comparing and apple with….. a pear.
And believe me, your fund’s return will depend on that choice more than anything else over the long term.
Also, the word of caution: those default mixed fund tend to be some of the more expensive options, and what’s more, you don’t really know how your money is invested. And isn’t the point of investing to be able to choose where you want your money to be? which industries you want to support?
- if you don’t support gambling, how do you know your super fund is not investing into Casinos?
- if you are against mining, how do you know your super fund is not investing into RIO or BHP?
- or if you want to support cleaner energy, social justice, equal opportunity, environmental improvements, how do you know your super fund is even considering any of those ethical issues?
So, look through the PDS and list of funds available. Do you have a choice of specialist funds? Then you can choose the ones that are the best in:
- specific market or
- specific industry or
- specific type of asset.
With a little research, you can create your own investment portfolio that will:
- support your cause and your believes,
- improve the mix of growth and defensive assets,
- which in turn should improve your super fund performance.
But make sure you are always able to change and update the portfolio at any point in time.
And remember: Past performance is no guarantee for future performance of any Superannuation Fund; however a good investment mix should provide a good long-term return that will boost your retirement nest-egg.
2. Appropriate insurance (does not apply to pension funds)
Is your super choice always better that your employer provided super fund?
No, not always and before you dismiss the fund your employer provides, you better check the insurance options available to you.
If you still have a mortgage or a family that depends on your income, your personal insurance might be more important than all the investment choices or even low fees. And if you have a serious medical issue, you may find that no insurance is available to you in the retail market or is above your budget due to high costs.
Therefore, if through your employer you are offered access to a corporate super fund, this could be the best option for you, as the insurance cover is underwritten on wholesale basis. And then, you don’t have to go through any underwriting and hopefully you can get the cover you need to provide financial security for your family, should something happen to you.
Insurance included can be:
- life insurance,
- Total & Permanent Disability (TPD) and
- Income Protection insurance.
There are many advantages to have insurance through super, but there are disadvantages as well, so you need to be aware and make an informed decision.
3. Superannuation & Pension fund fees and charges
Now we are coming to the hottest topic – that was so loudly underlined by the Bear Investor author Scott Pape. Yes, I did read the book, and yes, I agree, this is a terrific book as a starting point, but only as a start to your financial journey.
Do I agree that Hostplus is the best super fund?
NO! As I said before, there is no such thing as the best super – and I hope I managed to explain those reasons by now.
You really have to find a superannuation fund that suits you and provides all the benefits you either want or need.
What fees can you expect to pay to the super fund?
- Entry and Exit fee – fortunately most super funds stop doing it, but please check PDS to confirm,
- Administration fee – those are fees charged by the super fund directly for their work for members, such as preparation of PDS, statements, tax returns, customer service,
- Switching fees – payable if you want to move full balance or portion of your money from one investment option to another within your super fund,
- Trustee fees – those are fees charged by the trustee of your fund for their work to ensure you super fund stays compliant and activity is carried out according with PDS,
- Investment Management Fee – this is the fee charged by the underlying fund manager, so people who actually make investment decisions for you, do daily trading and hopefully provide your fund with good investment return.
Another misleading information about fees when comparing funds. You cannot compare costs of investing into the International Share manager to Australian Share one. Both are growth assets, but costs to invest into international shares as well as the necessary research is so much greater, which will impact on the level of the investment fee payable for such a fund. Again, it is not comparing apple with apple, but I do not see anyone disclosing that.
Some super funds may have more types of fees, so read the PDS of the fund you are considering.
4. What other services does the superannuation fund or pension fund offer?
Some super funds are much more progressive that others, again check what you need and what you don’t as each additional service might cost you extra. For example:
- Can you access your account details online?
- Is it easy to make additional contributions into your account? or in case of pensions – withdrawals or changes of pension payments.
- Does the fund offer the option for personal financial planning advice or retirement planning advice?
A word of caution, industry funds for years have been bashing financial planners for charging fees for their services. The truth of a matter is only general advice is available from your super fund for free. If you wish to receive detailed, personalised financial advice, you will be charged a fee for the advice of a financial planner who is employed by that super fund.
Also. just to make sure that you are fully aware, the financial planner that is not aligned with any financial institution will provide you with impartial and the most diligent advice looking at all industry options that are the best for you. The financial planner of the super fund has underlying interest to ensure that you stay with that fund, hence this is an advice as for the best interest of the super fund and not necessary for you as a client.
I know this is a long(ish) article, but I hope you got hips of valuable information here. Just to recap those steps:
1. do your checklist of the features and services that are the most important to you, your family and your life,
2. do your research which funds can actually fulfill your needs,
3. check the prices charged by superannuation funds you consider,
4. choose the best investment portfolio for your needs and your risk profile.
If you are still unsure, or just simply you want the best choice, just speak to a financial planner, we are specialist in this area, we have access to lots of extra data of all super funds in Australia.
If you do not have a financial planner, reach out, I am here to help to make sure you have the most suitable super fund, and the best financial strategy implemented, so you can actually reach your financial goals and enjoy your life and ultimately your retirement.
If you would like to learn more about investing, enjoy this special eBook addition: 12 Investment Principles.
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