Step 1: A Group Deal?
There are two ways you can join a Super Fund. You can either join as an individual or you can join as part of a group – usually through your employer.
Generally if you join as part of a group you will get some benefits because funds like to deal with larger groups of members.
These benefits usually include lower fees, cheaper insurance, automatic insurance cover without medical evidence and sometimes access to other features like education, advice and discounts on banking or home loans.Everything else being equal, your super will grow faster if you pay lower fees or insurance premiums. Group membership deals are usually available in the public sector, in Industry Funds or in company funds.
The downside is that you may lose the discount if you change employers and end up paying more than you would otherwise. Its always good to review your Super options when you change jobs.
Step 2: What’s Important to You
Start with your current balance, annual contributions, what investment option you are in and how your existing fund has performed. You should also know what fees you are currently paying, what insurance cover you have and the premiums you are paying. Most of this will be on your Fund statement or can be found on their website.
Consider your personality traits. Do you need to be involved? Or are you happy for others to make the decisions for you? Do you need online access to your balance? Do you need advice?
Step 3: Investment options and performance
The formula for how much Super you end up with is:
Closing Balance = Starting balance + contributions + returns – fees – taxes
So, if your budget means you can’t change your contributions, then you need to focus on returns and fees. These are the things you can control.
Past performance isn’t everything - after all, it’s just history. It’s not a reliable guide to what will happen in the future – but it does give some clues. Some funds have managed to deliver superior performance over lengthy time frames. Focus on performance over 5 or 10 years. Make sure you are comparing returns for the same types of assets over the same period.
Does the fund have a clear investment strategy? Has it changed recently?
Make sure the fund offers a range of investment options that suit your personal risk and return profile and can be readily understood. Can you change options later on, at little or no cost.
Higher fees generally deliver more choice but this doesn’t necessarily lead to better investment decisions or better returns.
If you like to be involved in these decisions and create your own portfolio, the you will need to look for greater investment choice. Some funds even allow you to choose individual shares. Don’t consider this unless you know what you are doing and are interested enough to keep on top of it.
Asset allocation is the key to returns. Make sure you choose an option that includes a heavy weighting to Growth Assets. If you are investing for the long term – remember if you are 28, you won’t be spending any of this money for almost 30 years and some of it for perhaps 70 years or more. Inflation is your enemy. Look for at least 70% allocated to growth assets. As you get closer to retirement you can think about winding this back.
Two thirds of the money you will spend in retirement from your Super comes from the earnings on your savings. That’s why it is so important to get your investment decision right.
Step 4: Fees
The other variable you can control is fees. Generally low is good, but don’t sacrifice performance just to get a lower fee. A dollar saved in fees is as good as an extra dollar in returns.
All funds charge fee, some fees are more obvious than others.
Generally they consist of a fixed weekly or annual membership fee, an administration fee worked out as a percentage of your balance and an investment management fee also based on your balance,but dependent on which investment option you choose. There are also usually ad hoc fees for specific items like changing your investment allocation.
Look carefully at any ongoing fees and fees that are deducted from your contributions. Don’t focus too much on the fees that you’re only going to incur occasionally.
Step 5: Insurance
In most cases, insurance options will not be a major determinant of which fund is right. Check what cover you have in your current fund. Most Super Funds provide some level of cover unless you opt out. Is it the right cover for you?
Never cancel insurance cover until you are sure you no longer need it or you have replacement cover in place.
You are not limited to the insurance provided by your Super Fund. You can now use your Super to pay for insurance from a number of insurance providers. This can often be the most cost effective way to buy insurance.
For some people though the default insurance cover might be the only cost effective source of cover. This might be because of particular health issues or the type of work you do. If this is you, make sure the fund you choose will replace the insurance you have. In these cases it could be the most important factor in choosing a fund.
Step 6: The future
It would be nice to keep the one fund for life. Often this is not practical.
Some funds provide a much better deal than others when you change jobs, leave the workforce for a while or for those who retire and convert their Super balance to a pension.
Check what would happen in these situations. Can you choose to keep your fund or will you need to move? Will the fees you pay change? Will you still have access to all the same investment choices, insurance cover and other benefits as you did when you were an employee?
Not all funds offer a pension option.
Step 7: Other benefits
There are quite a few other items that may be important to you that could influence your choice of fund. These include:
Online access to your balance and transactions and perhaps to make changes to your investment options. How easy is the website to use?
What are the regular communications to member slike? Booklets, newsletters, annual reports, performance reports and statements. Are they easy to read? Can you understand what they are saying?
How easy is it to talk to someone when you need help?
Access to education on superannuation and general money issues?
Remember, everyone is different. Before you make your decision, decide what really matters to you. This will guide how much importance to place on each of the 7 items.
The right advice
Choosing a fund can be complex. The right choice isn’t always obvious, so it can pay to seek professional advice.
LifeSherpa can help.
You can usually pay for it from your Super Fund.
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.