Many Australians would be better off ditching their super fund in preference for a lower cost version that performs just as well, if not better than their current choice. Many super funds are too pricey for what they offer and are a drain on investors’ retirement savings. Putting it bluntly, many super funds are duds.
As at June 2011, there were 389 super funds on the market across industry, retail, corporate and public sector funds. Most people can only access industry and retail funds – since corporate and public sector funds are restricted to people working for a particular company or for the public service. Unfortunately there isn’t a scorecard listing the best super funds from 1 to 389, but there are ways that you can compare them.
Here are the most important areas of comparison, in order of importance for most people:
2. Investment performance
3. Investment options
5. Extra services such as financial planning and home loans
Surprisingly, many people will choose a super fund based on past performance alone, irrespective of the fees incurred. Others get dazzled by exciting investment options such as emerging markets or private equity, and overlook the fees sucked out of the account each year. Both investment performance and investment options pale in significance to fees. Indeed, it’s the fees that you should focus on first and foremost when choosing a super fund.
It mightn’t seem like a lot, but a 1% difference in fees between similarly-performing super funds (Super Fund A charges a 2% yearly fee and Super Fund B charges a 1% yearly fee) is an awful lot. Over 40 years, it means a 30% gap in retirement savings, or the person invested in super fund A retires on $700,000 compared to $1,000,000 for the person in Super Fund B. It’s a massive difference.
As a starting point, track down your super fund’s product disclosure statement (PDS) or the summary statement that you receive from your fund each year, called the member statement. Seek out the total fees figure, which tallies all fees and charges on your account over the course of the year. As a ballpark figure, 2% or more in fees is too much, unless of course you’re into unusual and high-performing investment classes that aren’t available on lower-cost funds. You’d want to be getting fees under 2% and ideally much lower. You may find that fees are high because a cut is going to a commission-based financial adviser.
The best way to think of fees is a hurdle you have to jump before you can begin making money. If your fund charges 2% each year, then you have to pull in at least 2% to break even. If the fund fails to perform and returns 0% one year, then you are losing money. Don’t forget about inflation at 3% or more, eroding the value of your money. Say the fund charges 2% in fees and inflation runs at 3% a year, you require a 5% return to simply break even. If your target is an 8% yearly return, your super fund must pull in 13% each year to meet this end. That’s a big ask.
The moral of the story is that fees are one of the few areas that you can control. Inflation is out of your hands and so is investment performance to a large extent. So take control of the fees you pay each year.
By and large, not-for-profit industry, corporate and pubic sector funds are cheaper than retail funds and are probably the first place to start on your search of a low-cost super fund. Retail funds are usually the priciest because they’re geared to spin a profit and to remunerate financial advisers.
But fees are not everything. Investment performance is also critical and funds should be compared on yearly returns. But remember that you can’t compare a balanced fund to growth fund, or a high growth fund with a growth fund. A 100% Australian equities fund can be compared to a 100% Australian equities fund, however. Also compare the fund to its underlying benchmark, or market.
Some funds are bare bones and do not offer exposure to some markets and investments. If you’re keen on emerging markets, for example, you may find that many funds don’t offer a broad investment range – and this may mean compromising on investment choice for lower fees. It’s up to you.
Another important consideration is insurance cover, and this can be particularly relevant when comparing industry funds. Some industries are more dangerous than others and insurance premiums may be higher for particular industry funds compared to others (although most industry funds will offer categories for lower-risk members). If you have poor health or experience problems getting insurance cover then this will be a particularly important consideration when comparing and ultimately choosing a fund.
This article is of a general nature only and does not take into account your individual circumstances. For advice, TheBull recommends that you employ the services of a qualified financial adviser.