The 4 ways to invest your super
Which one suits you?
Choice can be immobilising. There’s a name for it – analysis paralysis. It often means that investors end up defaulting to the easiest option even if isn’t the best for them.
A common place we see analysis paralysis is with superannuation. A large proportion of Aussies stick with their default funds. Many people find it overwhelming to change a superfund.
The fees, performance, fund options, and sheer number of superannuation providers all contribute to this reluctance to make a switch. And that’s assuming that all of this information is easily accessible and not jargon-filled. It isn’t hard to see why people don’t engage with their superannuation or change it.
Here’s a more palatable perspective - when you break it down, there’s only four main options for investment options in superannuation.
Understanding which option works best for you will make the choice easier and help to decide on which superannuation provider to pick.
Below, I provide a quick explainer of the four options.
Super investment options
There are four main options for investors regarding superannuation.
Pre-mixed options through industry and retail superfunds
Available through industry and retail superfunds, this is the default option that offers a pre-mixed asset allocation. Think your ‘Balanced’, ‘Aggressive’, or ‘Conservative’ type funds. MySuper options are also pre-mixed asset allocations. These funds are classified as ‘multi-asset funds’, and will typically contain asset classes such as Australian and International Equities, Fixed Income, Listed and Unlisted Property, Alternatives and Cash.
Each fund will have a mandated range of your portfolio that can be allocated to each asset class. For example, AustralianSuper’s Balanced option can hold a range of Aussie shares between 10 and 45% - it currently holds 24.8%. A balanced fund with Rest Super can hold between 11-21% Australian shares – it targets 16%. Then – you look at QSuper’s Balanced option – they’ve got 25.5% in Aussie equities.
Professional investors will manage the allocation decisions and the underlying investments in each asset class.
The choice of pre-mixed option is based on the return that you’re looking to achieve for your retirement and the level of diversification that’s appropriate for your circumstances. As you can see, the mix in the portfolios can vary greatly between superannuation funds so it is important to pay attention to the specifics of each fund.
Asset class level options through industry and retail superfunds
Also available through industry and retail superfunds, these options allow you to choose your exposure to certain asset classes. This is how I invest my super. I’ve chosen this option because the fees are lower than the pre-mixed options, and I’m able to make my asset allocation more aggressive than the pre-mixed options. I’m 32 years old and have at least 30 years before retirement. I do not need an allocation to cash which is included in all the pre-mixed options from my superfund.
This option allows you to invest 100% in Australian equities if you choose, You could put 50% in international equities and 50% in cash. It provides the flexibility to choose your exact allocation to each asset class you want exposure to in your portfolio.
Direct Investment options through industry and retail superfunds
This option is for investors that do not want the complexity of SMSF administration, and are happy with a limited number of direct securities that they can invest in. Most industry and retail funds that offer this option allow investors to choose between ASX 300 shares, ETFs and LICs. For example, instead of choosing a 40% allocation to Australian equities, I can choose a 3% allocation to CBA, a 4% allocation to BHP, a 30% allocation to the NASDAQ 100 ETF NDQ, and so on.
Self-Managed Superfunds (SMSFs)
SMSFs allow complete control and transparency for investors, but come with regulatory and compliance burdens. Given their flat service and administration fees a SMSF only suits balances of a certain size.
More Self-Managed Super Funds are opening, as investors look to access the benefits and flexibility of the vehicle. It offers unique options for investorso – examples include the ability to invest in direct property or the ability to have multiple members in the Fund (particularly appealing to reduce the flat service fee cost across multiple individuals).
I’ve taken a more in-depth look at the difference between Direct Investment through your superfund and Self-Managed Super Funds (SMSFs). If you’re an investor who is looking for individual security level control, one of these options may be right for you.
What are the key differences?
Below are some of the key differences that are important for investors to understand which option may be right for them.
More resources:
Why you shouldn’t wait until 35 to take your super seriously. The Australian Financial Review reported on a Rainmaker study that concludes that the best time to start taking your superannuation ‘seriously’ is in your mid-thirties. I disagree, and go through the maths on why.
This 1-hour super check may add 25% to your retirement balance. My homework for all investors with superannuation.
