Key considerations when choosing a default super fund for your employees

In the second of this two-part mini series, Canstar’s Group Executive of Financial Services Steve Mickenbecker discusses the top five considerations when choosing your default super fund.

Now that we’ve established how vitally important it is to do the proper due diligence when choosing a default super fund for your employees, let’s explore the range of factors you may need to consider when selecting a default super fund for your employees. Some of the most important include:

  Fees paid by employees

There are a range of fees super funds may charge to members. Common types of fees to take into account are:

Superannuation administration (aka management) fee: charged to cover admin costs, such as for sending out annual statements to members, initially establishing or closing an account, or processing contributions and withdrawals.

Superannuation investment fee: charged by the fund manager for managing investments. It may also include performance fees, which may be charged if the fund manager exceeds his or her target. For example, if the fund manager has an agreed performance benchmark of 7% but manages to achieve a 9% return, they might charge an extra fee for outperforming their benchmark. Funds may also charge a fee if a member decides to change their investment option with the fund.

Advice fees: funds that are licenced may charge for comprehensive personal financial advice provided to members, though some forms of advice may be provided without charge.

Insurance premiums: charged for the insurance provided through the super fund, which members are often automatically opted into which is mandated for any MySuper product. The premiums reduce the member’s balance and ultimate retirement savings.

Australians collectively pay over $30 billion in fees to super funds every year, according to the Productivity Commission . Purely looking at the fees each fund charges on paper, they may not necessarily appear particularly significant.

The catch is that fees may potentially have significant impact over time.

The table below illustrates the impact of different fee levels on a retirement balance – the maximum, average and minimum fee levels for super funds on Canstar’s database. The table is based on a 30-year-old with a $50,000 super balance who earns $86,741 each year.

1. Improvement is a comparison to the maximum fee scenario.
Source: Canstar 12/03/2019. Based on the minimum, maximum and average fees charged by funds on Canstar’s database (from research collected for the 2019 Star Ratings) for their default investment option on a $50,000 balance held by a 30-year old. Total cost indicative of any applicable admin fees, performance fees, investment fees and other fees applicable to a $50,000 balance held by a 30-year old. All fees subject to change, contact your fund for more information. Income based on the average annual earnings for a full-time adult employee in Australia (ABS: $86,741), increasing by 2.5% annually and a superannuation balance of $50,000 for a 30-year old. Retirement age assumed at 67. Calculations assume employer contributions made according to minimum super guarantee contributions. Annual investment returns assumed to be 4% after tax. Past performance is not indicative of future returns. Fees charged at the market maximum, minimum and average as specified in the table. Investment returns, contributions, fees and tax obligations are applied and calculated annually. Outcomes are presented in future value.

  Performance

Fees are not the only factor to consider when choosing a product. If a fund generates healthy returns, an individual paying higher fees might still end up with a larger balance than a person in a lower-fee fund with inferior returns.

Likewise, if a fund is consistently lagging behind the market in terms of returns to its members, any money saved on fees may be unlikely to make up for the performance shortfall.

Unfortunately, there’s not always a positive correlation between the fees a super fund charges and the performance it delivers. In fact, in its 2018 inquiry report,² the Productivity Commission found that super funds with higher total fees on average deliver lower returns (net of admin and investment fees) for their members. It is just too difficult to sustain significant investment outperformance to compensate for fees that are excessive.

Funds, regardless of the fees they charge, may generate wildly different returns in the short term. This is why long-term performance, alongside the fees charged should both be considered.

As always, though, past performance is not necessarily indicative of future returns and shouldn’t be considered in isolation. Nonetheless net performance may be so critical to your employees’ retirement savings that it can’t be overlooked in spite of the uncertainty, and the longer the track record available to consider, the better.

  Services

If two or more funds are evenly matched in terms of fees and performance, you may wish to consider the services each offers before making a final decision. These services may include offerings like access to financial advice and educational seminars, the style and helpfulness of reporting, and the tools, calculators and educational materials on the fund’s website. These can all help your employees make more informed decisions about their super and improve their retirement planning.

  Insurance

Many super funds may offer insurance included as a default. This may provide death cover and sometimes total and permanent disability and income protection insurance. It is mandatory for a MySuper authorisation fund to offer death and TPD cover.

As a general rule, insurance provided through super can be relatively basic, with lower premiums (compared to stand-alone policies an individual might purchase) but potentially also lower levels of cover. Keeping that in mind, it could be a good idea to examine factors like the premiums, waiting periods, maximum pay-outs and scope of cover to determine whether the insurance being offered (if any) by a fund you’re considering represents value for money.

Some industries have different risk profiles from the community at large, which means that the decision should be made with a view to the specific needs of the current and future set of employees.

  Investment options

Superannuation funds may offer a range of investment options, from cash or conservative through to aggressive or high growth. Most also have a default option that your employee’s money will go in if they make no nomination. Some funds may apply a life stage transition as the employee ages.

While the default setting is unlikely to knock too many funds off your radar, you should be alert to this aspect if you find a fund at an extreme relative to those you are comparing it with. This can also impact on fees and risk/return.

It’s quite a responsibility

All of this might sound a lot like the roadmap for your staff choosing super that’s right for them. Of course, it is. To choose the right default super fund for your employees, you may have to think as the individual should.

About Steve Mickenbecker
Steve Mickenbecker is the Group Executive – Financial Services at Australia’s biggest financial comparison site, Canstar. He has decades of experience in the finance sector and is passionate about helping consumers make informed decisions with their personal views.
The views Steve Mickenbecker are not necessarily the views of the QSuper Board (ABN 32 125 059 006) and reflects their own personal circumstances so their choices and outcomes may be different to yours.

1 https://www.pc.gov.au/__data/assets/pdf_file/0014/228200/superannuation-assessment-draft-overview.pdf
2 Report can be found here: https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report