Learning how to choose a superannuation fund starts with understanding what a super fund is, the different types available and the kinds of features you should compare.
What is a super fund?
A super fund, short for superannuation fund, is a long-term savings vehicle designed to provide financial support to individuals during their retirement years. In essence, it is a pool of money contributed by employers — and, in some cases, individuals — that gets invested in a diversified portfolio, often including assets such as stocks, bonds and real estate.
The goal of a super fund is to build a nest egg for retirement through the power of compound interest. To achieve this goal, professional fund managers consider the fund’s risk profile when allocating investments to maximise returns.
Choose a type of super fund
Choosing the right super fund is crucial for securing your financial future. Essential first steps include understanding the main categories funds fall under and the types of plan structures available.
|Who usually runs it?
|Who is it for?
|How much does it typically cost?
|What happens to the profits?
|Industry associations or unions
|Anyone, but they're often tailored to specific industries
|Low to medium
|Profits get reinvested for the benefit of members.
|In-house corporate funds
|A board of trustees chosen by the employer and employees
|The company's employees
|Low, sometimes covered by employers
|Corporate funds can vary, but profits usually get reinvested for the benefit of members.
|Public sector funds
|A board of trustees chosen to represent the fund's members
|Profits get reinvested for the benefit of members.
|Medium to high, though low-cost options are also available
|The fund managers keep some profits, so the cost of fees may impact returns.
|Self-managed super funds (SMSFs)
|Individuals or small groups (up to six members)
|Anyone who wants more control over investment decisions
|Profits are your's to keep — if you can earn them. SMSFs require a significant time commitment and financial knowledge to run.
Plan structures: accumulation vs. defined benefit funds
A super fund’s structure will determine how the value earned eventually gets distributed to its members. There are two main types to understand:
- Accumulation funds. These are most common. Your savings will grow in value over time based on the amount of money put in and how well those contributions are managed. How much you’ll have at retirement depends on the fund’s investment return.
- Defined benefit funds. These are less common. Your savings will grow according to a formula instead of the funds’s investment return. How much you’ll get when you retire depends on things like your salary, how long you worked, and how much you and your employer contributed.
Most super funds are accumulation funds, but some members of corporate, industry and public sector funds have defined benefits.
» MORE: Types of employment in Australia
Choose super fund features to compare
When comparing super funds, consider aspects such as the mix of investment options, the fees charged, perks available to members, and other critical features. Choose what’s important to you and compare super funds accordingly.
Assess the historical performance of the fund. Keep market trends in mind and look for consistent returns over the long term.
Financial advice providers and online tools can help compare superannuation funds for you. However, it is prudent to remember that commercial interests may influence the recommendations.
A government-provided comparison tool is accessible through your individual ATO account online, where the superannuation section allows you to track your super balance and compare your fund’s performance and fees with the rest of the market.
Understand the fund’s investment strategy and ensure it aligns with your risk tolerance and financial goals. Are you happy with aggressive, high-risk international growth products? Or are you more comfortable with the home-grown default balanced growth mix?
For some, there is an additional issue of ethical and sustainable investments. Most funds today offer sustainable, green and ethical investment options as part of their investment mix.
Fees and charges
Various superannuation fees can cost you anywhere between 0.9 and 1.2% of your super balance annually, according to Canstar. Depending on the type of fund, you might have to pay administration, investment management, performance or some other kind of fee. It’s important to compare fees across funds because high costs can significantly eat into your returns over time.
You should also be aware of any fees associated with leaving a fund. High exit fees can be a deterrent when considering a switch.
Insurance coverage within superannuation funds typically encompasses three main types:
- Life insurance (also referred to as death cover)
- Total and permanent disability (TPD) insurance
- Income protection insurance to replace your regular income through times of illness.
Most funds offer life insurance and disability cover. When evaluating the default insurance provided by super funds, consider factors such as:
- Premium rates
- Coverage amounts
- Any exclusions or definitions that may impact you.
Quality of customer service
Consider the quality of customer service. Accessible and responsive support can be vital when you need assistance. It pays to research your target fund for recent news of mergers or restructuring, which can impact the quality and responsiveness of customer service. Look for recent complaints against the fund to uncover potential customer retention and care issues.
Is a full range of services available via a digital portal? Can you change your investment mix online, follow the fund’s performance, change your contact details, lodge an income protection claim or change your beneficiaries online? A good customer service portal with digitised service access will go a long way toward improving your level of service and satisfaction in dealing with your super fund. Ask for a demo to see how you like it.