While it’s comforting this performance test has been legislated to protect people from so-called “dud” super funds,no one is going to care as much about your personal super asyou.
Many of us don’t think twice about what super fund we get put in,but poor performance can cost you thousands.Marija Ercegovac
Choosing a good fund can positively impact your retirement savings,but sticking with an average or low-performing fund will set you back. Making the right choice can mean thousands of dollars difference when it comes time to retire.
Dawn Thomas is a Senior Financial Advisor at The Wealth Designers,a financial consultancy with offices in Perth and Sydney. Educating people on superannuation is a passion point of Thomas’.
“People don’t often realise how their super funds are set up. If you don’t nominate your own,you’ll have one set up by your employer and often that’s the one that follows you as you change jobs,” Thomas says.
For many people,super is a set and forget. But it’s absolutely worth keeping an eye on it and doing health checks as it progresses.
There are two things to turn your attention to – your fund’s performance returns and the fees you’re incurring.
However,Thomas flags “while it is important to have a cost-effective fund,finding the cheapest is not always the answer”.
Investment options within super
Super funds offer a range of investment options and usually members can choose what percentage of their super contributions – also called ‘allocations’ – are put in each option. These options vary in terms of level of risk and potential returns.
Investment options are classified either as defensive assets,which are generally lower risk but provide lower returns,or growth assets,which have the potential to provide higher returns but are higher risk. Some common investment options include:
Super funds offer a range of pre-mixed super fund products,including:
According to super research provider Chant West,over the past decade,the median growth fund has returned 8.5 per cent per year on average. This is the option most people in Australia are invested in and would be classified as good super performance. The median return for all super funds over the last 10 years is 7.5 per cent per year.
How life stage plays a role in allocating your super
The default fund most people go into if their employer assigns them a super fund is a MySuper option. “This will typically be a balanced option,” Thomas says,where the investment options are spread to provide a balanced level of risk and return.
“Some funds also use ‘life stage’ options,which assigns investment options based on someone’s age. It is designed to help hands-off people update their investment option automatically as they get older.”
Senior financial advisor Dawn Thomas is passionate about getting people invested in super.Supplied
But if that’s not the case for your fund,or if you want to be more involved and take charge of your super,consider your age and how long it will be before you access your super when steering how your super is allocated and invested.
If you’re a long way off accessing your super,say around the age of 20 to 40,Thomas’ best piece of advice is to look at how much is invested in growth and defensive assets.
“If you can’t access funds in superannuation for a long time,you have to question the level of defensive assets in your portfolio,” she says.
“If you have a higher than required allocation to defensive options,you are effectively creating a drag on your long-term portfolio performance. Long-term is typically defined as seven-plus years.”
Younger workers are often advised to allocate more of their super to growth assets,a change which can be made through your fund’s online portal. Defensive assets can be useful if you want to keep your funds stable,Thomas says,such as if you’re planning to use your super as part of the First Home Super Saver Scheme.
“[Your allocations have a] compounding impact. A 1 per cent return difference,which could be the difference between the default balanced fund and a more growth-oriented fund,could result in a difference of over $200,000,” she says.
How can I determine how my super is performing?
Many super funds offer online calculators which allow you to compare your super against other people your own age. However,to see the nuts and bolts of your super performance,the tax office provides the YourSuper Comparison Tool via your MyGov portal.
If you can,delve deeper and look at like-for-like comparisons. “If you are looking to compare funds,go onto the fund website and look at the split between growth and defensive assets. A balanced option can have ranges of growth assets for example between 65 per cent - 80 per cent,depending on the fund,” Thomas says. She advises looking at performance over the last seven years to make a fair comparison.
When comparing,you’ll want to assess if your fund is delivering below average or negative returns;if the lack of diversification and being focused on a single investment option opens you up to underperformance or risk;and moreover,if there are high fees compared to other funds that offer similar superannuation products.
What else should I consider when it comes to choosing or changing super funds?
Some people,especially younger generations,might want to consider joining an ethical super fund,Thomas says.
“Ethical funds typically have higher fees,but it is important again to look at long-term performance as this takes fees into account. Also,the investment cycles can differ a little from mainstream funds due to the different allocation to sectors and industries.”
“Ultimately,the ethical investor is driven by a different set of objectives,so it is important for you to make the call on whether that is what you want to do with your money.”
Outside of ethical investment options,transparency and customer service aren’t to be underrated when it comes to picking a fund. If you are approaching retirement,it’s important to be with a fund that allows members to easily access paperwork for Centrelink,adjust payments,or make withdrawals.
“You can call up a fund and ask them what their claims process is like and average payout time to beneficiaries. There is a bit of difference between funds on how quickly this can be turned around,” Thomas says.
Most super funds also include life,income protection and total and permanent disability insurance. It’s worth checking what coverage your fund includes to help inform your decision-making.
This is the second part of our,covering everything you need to know to get your superannuation in its healthiest possible shape. Come back next week for our next piece on how to make additional contributions to your super.
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This story was created in partnership with Colonial First State. The content is independent of any influence by the commercial partner.