One of the most talked-about investment decisions many investors make (or, because it can seem too hard, don’t make) is the choice of which superannuation fund is better for them when it comes to building a retirement nest egg.
There are a plethora of super options: Industry funds, retail funds, self-managed superannuation funds (SMSF), platforms, self-directed investments… and the list goes on.
So let’s break down some of the jargon:
Industry superannuation funds: These are not-for-profit funds, run by industry and worker representatives. The were originally industry-specific, for example the Retail Employees Super Fund, but most now accept applications from anyone who wants to be part of the fund. Others, such as Australian Super, are actively marketing to anyone who wants to join. Because they’re not-for-profit, their fees tend to be lower.
Retail superannuation funds: As the name suggests, these funds are run for profit by their providers. Think investment banks, wealth managers, insurance companies and other financial services types. Their providers are the usual suspects — everyone from AMP and ANZ to Colonial First State and IOOF, among others.
Self-managed superannuation funds (SMSF): Anyone can run their own superannuation fund, as long as you have the time, expertise and interest — and you’re prepared to put in the work. The fund will need a trustee, bank account, auditor and other considerations — but the trade-off is much greater flexibility when it comes to investment decisions, and the fees that are charged.
So what should you consider when choosing a superannuation fund? Here are some areas to keep in mind:
Ease of management: If you’re keen to invest time, effort (and yes, do the paperwork), then a self-managed super fund (SMSF) might be worthwhile, but if you’re not sure you’re prepared for all that, you might be best to consider an existing superannuation fund that you can simply join, and which will do all of the paperwork for you.
Fees: Fees seem small, as a proportion of your investment, but they can take a chunk out of your returns. A very significant chunk. Even a 0.5% difference in fees can cost you tens of thousands of dollars over your investment lifetime.
And it’s not just the fees charged by the fund itself (as a percentage of your assets) but also those fees charged by the investment options themselves. So, for example, your super fund fee might be, say, 1% of your assets. But if some of those assets are invested in, say, an actively managed fund, that fund might charge, say another 1.5%. Yes, they do add up very, very quickly!
Flexibility: It’s one thing if you want a ‘set and forget’ superannuation option, but what if you want to choose where your money is invested, either across asset classes or individual shares? What if you want to avoid certain industries or companies? Different super funds give you those different options, so make sure you choose a fund that has what you need.
Returns: Seems obvious that you should make your decision based on the returns earned by your super fund, right? Did we leave the best ‘til last? Not so fast, Fool! What returns are you really looking at? Remember, that up to 7/10 managed funds fail to beat the market over the long term. And the star fund manager last year probably won’t be top of the pops this year. Will last year’s footy premiers win this year? Next year? In five years’ time? It’s very unlikely, so don’t fall into the trap of just following the crowd. And remember, indexing gives you the market return, less a very small fee — and may well be the better long-term option anyway!
Choosing a super fund can be a difficult and complex task. There are myriad options, all with their slick marketing campaigns. Everyone’s risk tolerance, time horizon and level of interest are different — but here a couple of thoughts.
If you’re not keen to do too much yourself, go with a low-fee industry fund. When returns are variable anyway, the difference in fees is likely a material impact on your portfolio. And if you’re given the choice within that fund (or better yet, make sure the fund you join gives you that option), choose low-fee index tracking options. If your time horizon allows, we’d suggest a good mix of Australian and, importantly, International shares. If you’re retiring soon, and think you’ll need a lump sum when you stop working, you might want to add an allocation to property and cash.
If you want to take a little more control, there are two options. For complete control (and you have to be ready to do the paperwork) look closely at an SMSF. If you want flexibility without the paperwork, find an industry fund that has a ‘direct investment’ option — so you can decide what companies you want to own (from within a given — and restricted — list).
And don’t let the super jargon get to you — it’s easy if you give it a chance and the effort is definitely worthwhile.
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