Choosing a superannuation fund is probably the most long-term decision you will make over your lifetime, so it’s crucial that you make the right choice to safeguard your retirement.
And a good place to start is by comparing fees.
Flinders Private Wealth principal Michael Abrahamsson says “choose a fund that keeps costs low, as low costs are an important driver of returns”.
In 2020, the average default MySuper product – which, unless you actively choose your fund is the type of fund your employer will set you up with – charged 0.15 per cent a year for administration, 0.8 per cent for investment management, and $78 for member account-keeping.
That might not sound like a lot. But for a young person, it can be massive.
“While for high-account balances the member fee may tally to only about 0.1 per cent, for young people just starting out in super who have a very low balance, a member fee of $80 a year has a huge impact,” said Alex Dunnin, executive director with research group Rainmaker.
The chart below shows that if you have as little as $1000 in a fund you could find yourself paying 7.5 per cent of your balance in regular fees and as much as 25 per cent in insurance.
And adding in the effect of insurance costs makes a dramatic difference.
On some low-balance funds, insurance costs could add 17.5 per cent to costs, on top of the maximum allowable fee of 3 per cent.
Insurance is opt-in for people under the age of 25, but if you need it, it will eat into your balance big time. So you need to check the total fees charged for any fund you plan to join.
Overall, the Productivity Commission found that workers earning $50,000 a year could lose $100,000 by retirement if they sign up to a fund with fees 0.5 percentage points above the average.
And then there’s the small matter of fund performance.
Fees are important, but you also need to invest in a fund with a good track record of delivering solid returns to members. Otherwise your money won’t work as hard as it could to safeguard your retirement.
“Make sure you join a fund that has reasonable performance over time and look back five to seven years to determine that,” said Robert Goudie, an adviser with Consortium Private Wealth.
The next thing to consider is asset allocation.
“Being too conservatively invested in a long-term fund is a real risk,” Mr Goudie said.
“If you are 18 or 20 then getting a good return over maybe 42 years is vital to building a balance.”
Asset allocation isn’t only about returns. It’s about what you want your money to be doing.
But older people are more likely to be concerned about corporate governance.
If you want your money to drive better social outcomes, Mr Goudie said “most major funds have ethical options you can choose from”.
There are also funds dedicated towards ethical investing that also deliver solid financial returns, including Australian Ethical, Future Super and Good Super.
Knowing the details of your fund’s operations will also help determine whether its fees are reasonable.
“A lot of funds employ index strategies which simply follow an index, but they present [themselves] as something more complicated,” Mr Abrahamsson said.
To determine your fund’s investment style, find out where it has invested its money.
If it is mainly in shares or another listed asset class, then it is likely to be following an index.
“It is likely to be doing what something like a Vanguard ETF [exchange traded fund] does and it should have costs between 0.04 per cent and 0.09 per cent,” Mr Abrahamsson said.
For more complicated investment strategies, you pay more in fees.
For example, AustralianSuper charges about 0.7 per cent on a $25,000 default balance and a maximum of 1 per cent, depending on the size of the balance. And insurance charges are added to that.
Funds that allow you to design a suite of investment products will cost even more – because with those funds, you are paying for management of “critical infrastructure assets like toll roads, renewable energy and other transport infrastructure,” Mr Abrahamsson said.
I’d be happy to see people pay more to be in those funds as they have very attractive returns over time,” Mr Abrahamsson said.
The averaged balanced fund with exposure to infrastructure has returned 5.5 per cent annually for three years and 6.9 per cent for five years, according to Chant West.
The top-performing funds over three years that young people are most likely to join have equalled or bettered that average, says Rainmaker.
But many have fallen below it.
Spaceship has shot the lights out because of its focus on the tech sector – returning more than 12 per cent annually for the past three years – and Future has an ethical bent.
The last consideration for young Australians searching for a fund is contributions.
“If you contribute extra at a young age, then compounding returns kick in as your money grows,” Mr Goudie said.
“If you earn between $37,000 and $57,000, then you can use the co-contribution scheme where the government matches your contribution by up to $500.”
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