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Performance, fees, services – Steve Mickenbecker, Group Executive – Financial Services at Australia’s biggest financial comparison site, Canstar outlines 5 considerations when choosing a super fund
When you picture your retirement, you likely have a number of ideas around what you would like to do with all your well-earned free time, as well as the standard of living you would like to maintain. Chances are your aspirations are not going to be achievable on the age pension alone and to realise these dreams you will need some additional income from your savings. One of the key tools Australians use to build these savings is through compulsory superannuation – and the importance of carefully choosing a superannuation fund cannot be overstated.
Choosing a super fund is a bit like choosing between job offers – you would consider potential employers based on their track record for performance, how much will end up in your pocket and any additional benefits they may offer. It is likely you would carefully consider the merits of each offer, ask the recruiter or hiring manager some carefully considered questions about the role and weigh up your options before making your final decision. Taking the same level of care when selecting a super fund could make a significant difference to your savings by the time you retire.
When selecting a super fund, some of the most important factors to consider include:
Two things that grow your superannuation savings are: the contributions paid by your employer as well as any additional contributions you make, and the success of your super fund in managing the investment of those savings.
At the end of the day, the main purpose of superannuation is to grow your savings in preparation for the years after you step away from the workforce. The investment performance of your super fund is one of the key components to how much you will end up with at retirement.
Funds may generate wildly different returns in the short term, which is why long-term performance can be an important consideration. However, keep in mind that past performance is not necessarily indicative of future returns and shouldn’t be considered in isolation. Don’t expect to find a fund doubling the average, but don’t underestimate the massive boost to your nest egg that comes from what might look like a modest ongoing margin over its competitors. Time magnifies the differences through compounding over a 40-year work life.
Example: The Difference 1% in Annual Investment Earnings Could Make on Retirement Superannuation Balances
Source: http://www.canstar.com.au - 20/09/2019; based on a starting balance of $6,200 for a 15-24-year-old, as per ABS statistics. Employer contributions are taxed at 15%. Superannuation guarantee (SG) percentage of income is as per government legislation. SG contributions are assumed to be made quarterly for 40 years. Inflation is not accounted for in end-balance figures. Please note all information about income, annual superannuation fees and performance returns is for illustration purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account, or any additional fees such as insurance.
Investment performance is one thing, but the fees you pay to the fund for the management and investment of your super savings can be a drag.
Which brings us to fees.
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There are a number of fees that are commonly charged by super funds. These include administration costs, investment fees, advice fees and insurance premiums (which we will discuss later). According to a 2018 Productivity Commission report, Australians collectively pay over $30 billion in fees to their super funds every year. It might not feel like you are paying fees because the super fund just deducts them from your account, but don’t be mistaken – the fees are being taken out of your savings.
While super fees may not necessarily appear significant on paper, they could potentially make a significant difference over time. Why? Because paying higher fees could mean there is less in your account to invest, which will impact the long-term growth of your nest egg. Just as it does for investment performance, time magnifies small differences. It is a myth that there is a positive correlation between the fees a super fund charges and the performance it delivers. In fact, the Productivity Commission noted in its 2018 super inquiry report that super funds with higher total fees on average delivered lower returns (net of admin and investment fees) for their members. And so, the investment performance net of fees is the measure you should be considering.
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.
Learn more about QSuper's fees
Many super funds offer insurance as a default. The type of insurance varies but could include life insurance and sometimes total and permanent disability and income protection insurance.
Insurance offered within super is sometimes not as comprehensive as policies bought outside of super and default levels of cover can be low. This trades off against premiums that are generally lower. However, this varies widely among super funds as there are some that offer cover designed for membership from higher-risk industries that are more comprehensive but come at high cost. The converse will apply at some other funds.
Premiums are not the only factor you should consider when assessing insurance within super (though they are an important consideration). Also consider factors like what events or conditions are covered, the definitions of those conditions, waiting periods before benefits are paid, maximum pay-outs and the amount of cover offered to determine if a policy represents value for your particular needs.
Insurance is one of the trickier considerations to compare. But don’t overlook that every dollar you pay in premiums comes out of your savings and is not invested for long-term return. Yet again, via compounding, time magnifies the reduction this has on your retirement savings and it is significant, making insurance a trade-off.
Ask these questions when choosing personal insurance
Super funds can offer a variety of investment options, including growth, balanced or conservative, as well as some more specialised options. They come with different expectations about the level of investment performance and also different levels of risk, which means that at one or more times your savings could go backwards. Again, it is a trade-off.
Most funds have a default option when you join, normally in the balanced range, where your money goes if you do not make a choice. Some may also apply a ‘life stage’ approach, with a growth mix more dominant for the young, becoming more conservative as members approach retirement.
Choosing the right investment profile for you can depend on your stage of life as well as your risk appetite. It could be a good idea to talk to your super fund or financial adviser to help determine yours.
Another consideration you may like to keep in mind, especially if two or more funds are evenly matched in the above factors, is the services they offer. These may include access to financial advice and educational seminars, the style and helpfulness of how they report your balance (including fees), and the tools, calculators and education materials on the fund’s website. These services could help guide you to make more informed decisions and potentially improve your retirement planning.
This sounds like a lot to consider, and it is. But putting in the legwork now to select the right superannuation fund is as critical to your long-term lifestyle as choosing the right job. Both are worthy of the effort. The decisions you make now, even early in your career, will have a major impact on the level of your retirement savings and your future standard of living.
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 about their personal finances.
The views of the author are not necessarily the views of the QSuper Board. This is general information only and you should get professional advice before relying on this information.
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