Young & Invested: How to pick the right super fund
Confused about your super? Here’s where to start.
Welcome to my column, Young & Invested where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 17
I was about 14 when I started my first job and discovered what superannuation was – a concept that, frankly back then, had as much appeal as an impromptu maths test.
It wasn’t until almost a decade later that I finally acknowledged the existence of my super, and shockingly, it hadn’t magically grown into a fortune in my absence.
Fortunately, I know I’m not alone in this.
Around 70% of Aussies let their employer choose their fund for them, which correlates with a separate study that found 60% of people did not feel confident about managing their own retirement. I’d argue there is undoubtedly a link between levels of financial literacy on super and the lack of engagement from newer generations.
The thing about superannuation is that it’s a basic concept to grasp – especially when you are far from retirement. However it is also often the centre of highly complex, policy-driven debate, that adds a level of granularity that some younger people just aren’t interested in.
Obviously, it’s not ideal that an entire generation is slightly apathetic to their retirement – but in my opinion – entirely understandable. In a previous edition of this column, I discussed whether young people should care about super, given the prospect of retirement is decades away for most of us. In short, the conclusion of that article was a resounding ‘yes!’.
The relationship between you and your super fund might end up being one of the longest relationships you’ll ever have. And just like life, you’re at liberty to chop and change as you go. But much like picking a good partner, who you start with matters. Those smaller contributions early on can rival larger amounts in your later years. I guess commitment really does pay off.
Now that we’ve established its worth caring about, the next step is choosing the right super fund from a list of around 100 options. This week, Young & Invested explores some of the things you should consider when making the decision between funds.
Types of super funds
Retail
A retail super fund is run by a financial institution or investment company and is open for any individual to join. These often have a wide range of investment options allowing flexibility of choice. Such funds are for-profit meaning earnings generated are distributed to shareholders as well as members. Colonial First State is currently the largest retail super fund by assets in Australia.
Industry
Industry funds are typically reserved for employees of a particular industry (e.g. hospitality) with employers having their preferred funds. Some industry funds are open to all for example, AustralianSuper – the largest fund in the country - is an industry super fund with $360 billion in assets across over 3 million members. Such funds are lower cost and are ‘profit-for-member’, meaning that profit generated is returned to the fund as opposed to retail funds.
Self-managed
Unlike the other options in this list, a self-managed super fund (“SMSF”) is a private fund in which (as the name implies) you self-manage your assets. Each SMSF is allowed a maximum of 6 members, who are legally responsible for all investment decisions and for complying with the super and tax laws.
Given drawbacks such as high set-up costs, the need for constant monitoring, maintenance and administration, this is not suitable for the majority of young investors.
However, the latest figures from the Association of Superannuation Funds of Australia (ASFA), show that SMSFs are the second highest assets by fund type followed by retail and public sector funds.
Source: ASFA. December 2024. Visualisation: Chart Lab.
Investment offering
Whilst most people recognise the value of choice, this sentiment is not often echoed in the lack of member decision-making within pre-set superannuation funds where the primary decision is on asset allocation. There is however the opportunity for different levels of engagement, whether some choose to ‘set and forget’ or others prefer to take a more active role in their retirement.
Most funds provide customers with two options in the accumulation phase: MySuper and Choice.
MySuper
This is the default product that your fund will use if you haven’t exercised an allocation decision. You may have heard the phrase ‘lifecycle option’. Studies have found that a lot of members are in more conservative allocations than appropriate for their age. Therefore, the lifecycle investment strategy offers a solution in a ‘hands-off’ approach with appropriate risk and return levels as you grow older.
This is based on the premise that asset allocation differs for investors depending on their stage of life, with younger investors able to accept a higher level of risk. Therefore, the lifecycle option automatically adapts the defensive and growth allocation as you age. This is largely a risk adjustment strategy that acknowledges the lack of engagement among fund members and therefore, does some of the work for you.
Choice
On the other hand, choice super is for the more engaged individuals who wish to be in control of their asset allocation. This often comes in a ‘single diversified’ or ‘standard’ option, which is a one-size-fits-all approach that involves your asset mix remaining the same, unless you make the effort to change it.
You can find out more about how to pick your super allocation here.
MySuper has historically been lower cost, however the extent of this will vary across funds. Ultimately, it is important to determine how hands on you’d like to be and consider the implications of this decision.
Source: Productivity Commission Inquiry Report,Superannuation: Assessing Efficiency and Competitiveness. 2018.
Fees
Aussies pay over $30 billion a year in super fees (excluding insurance).
Comparing fees across super funds can be both a difficult and tedious process, however, is important to do so given small differences in fees can have a big impact on your ultimate retirement pot.
In a Productivity Commission inquiry on superannuation efficiency, it was found that a fee increase of just 0.5% for a typical full-time worker would cost ~12% of their balance by the time they reach retirement.
The most common fees are administrative costs, investment fees and other transaction fees.
The composition of administrative costs can include a flat, fixed amount that is charged regardless of your balance, or an asset-based portion that is generally a percentage of your balance. Some funds also often a combination of the two. Administrative costs come with a 15% tax benefit on deducted amounts which are generally returned directly into your super balance.
Investment fees are simply the cost paid to the investment manager. These will vary depending on your asset allocation e.g. fees for a cash investment option are cheaper than international shares.
Transaction costs incur when the investment manager buys or sells the underlying assets in your super which incurs brokerage. You will not be able to visualise the investment fees or transaction costs being deducted from your account, as they are deducted before the unit price. This means your return is net of these expenses.
The below is a visualisation of a hypothetical return example after all costs and fees are deducted.
Source: AustralianSuper. Measuring the performance of your super. 2024.
The Australian Tax Office’s (“ATO”) YourSuper comparison tool allows you to make a personalised assessment (based on age and superannuation balance) on what the annual fee for each fund and their relevant options would be.
Another fee to consider is an insurance premium. Some funds automatically provide you with death cover, total permanent disability and income protection cover, however it is important to determine whether this is the case, or it’s an ‘opt-in’ situation. Shani wrote a great article about the considerations surrounding having insurance in super.
The fees associated with your super will play a large part in your overall returns, however there should be more nuance applied than simply picking the lowest cost option. Remember that fees aren’t stagnant, but funds are under obligation to disclose changes and justify fee adjustments with a period of notice.
Performance
The phrase “past performance doesn’t equal future results” is bound to elicit some eye-rolls but is an important caveat. Comparing across funds by taking a quantitative perspective on their long-term performance returns can be a useful benchmark.
However, given some funds are still in their infancy (relative to the well-established funds in the market) evaluating long term performance (10+ years) is not always possible.
You can also evaluate performance by judging how well the fund has historically met their investment objective. The investment objective of all funds is to deliver a return that is higher than inflation – the extent of which will differ depending on how aggressive the asset allocation is.
The important part is that you ensure you are assessing like for like. For example, contrasting Fund A’s 10-year return in their balanced option with Fund B’s 10-year return in a high growth option is not a true measure.
Often it can be difficult to ascertain whether fees or administrative costs have been considered when reporting overall performance. The ATO YourSuper tool offers an overview of a fund’s 10-year net return (annualised rate of return after administration fees, costs, taxes and advice fees) for various allocation options.
It’s crucial to note that in your search to find the right super fund, due diligence is required at both the fund and product level.
Read previous Young & Invested columns
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