Your guide to superannuation: What, how and why?

Your guide to superannuation
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Choosing a superannuation fund can be difficult and confusing. In this article we break down what kinds of super funds there are, the common investment options they offer and why sustainable investing doesn’t have to mean losing out anymore.

Every Australian has a superannuation account, but many of us pay little attention to where our retirement funds are invested and what those companies are doing with it. Choosing a super fund and a super investment strategy is one of the most important financial decisions most people make in their working lives. The difference between choosing a quality fund and one performing poorly – or with prohibitively high fees – could make tens to hundreds of thousands of dollars difference by the time you reach retirement age.

So, what are the different types of super funds, and what should you be looking for?

The two main types of super fund are accumulation funds and defined benefit funds.

An accumulation fund works much like a portfolio in the stock market, growing your money over time with the value dependent on contributions and investment returns after fees and costs. Defined benefit funds are based on a formula rather than investment returns and are usually corporate or public sector funds, with many closed to new members. Most superannuation funds are accumulation funds, but if you have the opportunity to enter a defined benefit fund, think carefully as they are often very generous and cannot be re-joined if you leave.

There are five categories of funds superannuation options can be broken down into: Corporate, Retail, Industry, Public and Self-Managed. Some are industry – or business-specific –  and may not be available to everyone.

Self-managed super funds are the most flexible option but come with a disclaimer, while MySuper is a government initiative attempting to simplify the process of picking an investment option.

Main super subcategories

Corporate Funds: Offered to employees of large corporations like Qantas or Telstra. Arranged by the employer exclusively for their employees. Generally return all profits to members and trend toward the low to medium cost and fee range.

Retail Funds: Open to everyone, managed by a bank or investment company. For-profit, with medium to high cost, often with additional advice and platform fees.

Industry Funds: Have obtained a reputation for value due to their not-for-profit model. Low to medium cost with profits returned to members.

Public Sector Funds: Originally exclusive to federal and state government employees, some are now available to everyone. Not-for-profit, low to medium cost.

Self-managed Funds and MySuper: Self-managed superannuation funds (SMSFs) are do-it-yourself super funds for the savvy investor who wishes to have more control and flexibility with their retirement money.

SMSFs can include a pool of up to six people’s contributions, often friends, family or business partners, with all members required to act as trustees for the fund (or directors if there is a corporate trustee). Due to these rules, you and anyone in the fund are directly responsible for the investment decisions made with your contributions, meaning you are liable even if someone else made the call. You also won’t have access to any special compensation schemes or to the Australian Financial Complaints Authority, should anything go wrong.

It takes time and money to manage your own super fund, an average of 100 hours a year according to the Australian Government. You will also be required to maintain clear records and accounting, and to arrange audits each year. SMSFs are therefore generally not recommended for anyone who is time-poor or unfamiliar with the ins and outs of the stock market.

My Super Funds

More a default investing option than a fund in itself, MySuper is designed to be simple, low-cost and easy to compare, taking an ‘apples to apples’ approach to protect retirement savings from being whittled away by fees for unwanted services and financial advice.

As of September 2021, there were 91 public offer MySuper products with total assets of $923 billion. MySuper accounts are offered by retail, industry and corporate funds to members in the pre-retirement phase. Almost half (47%) of super funds offer a MySuper option, and they’re a great opportunity for the time-poor or financially disconnected.

Determining your risk appetite

Once you’ve decided what type of super fund suits you best, it’s time to choose one for yourself.

There are a few questions you should ask yourself before you start the hunt:

  • Is a high return or long-term security more important to you?
  • Are you happy to ride the index, or are you looking for a managed fund that will reach for more?
  • Are Australian securities enough, or would you prefer more international exposure?

There are three main investment options that almost every superannuation fund will offer:

Growth: Usually the highest risk, highest return option. Mostly shares and property

Balanced: A more diversified option, generally with some exposure to bonds or cash. Aims for reasonable returns without risking the biscuit.

Conservative/Defensive: Risk-adverse, conservative investment options don’t always meet the market return, but will generally lose less in a downturn as well.

While the nitty gritty is a little more complicated, super investment strategies can be split into two main categories: Managed and Indexed.

A Managed fund is run by a financial advisor or consortium, and will generally seek to beat the market average, but also comes with significantly higher fees.

An Indexed fund only seeks to match the market index growth, and usually relies on algorithms to pick shares. Fees tend to be very low on these funds, as they require no direct financial advisor supervision.

Ultimately every person has a different risk appetite and will have to decide what matters most to them.

Picking a winner

Once you’ve established some base-line requirements, check with your employer; do they offer a defined benefit funds, extra super contributions, or subsidised insurance? Often the answer will be no, in which case you’re likely looking for an industry or retail super fund.

The Australian Government offers YourSuper, a superannuation fund comparison tool that does its best to simplify choosing your fund with straight-forward comparisons. Easier said than done, as super funds offer drastically different investment options, portfolio splits, sector exposure and insurance options.

Fees will change based on which internal options you pick (an indexed option will be cheaper than the same company’s managed options for example), and as little as 0.75% more in fees can compound to more than $135,000 in lost super over 40 years.

Other resources like Canstar, Super Advice Australia and Super Guide can help with cross-referencing reviews and breakdowns, giving you a fuller picture of your super options.

Don’t be afraid to seek formal financial advice in this case, picking the right superannuation fund for you is well worth a consultation.

Putting your money where your mouth is

The global energy revolution is upon us. Sustainable and ethical practices have been drawn into the spotlight of late, spawning an entirely new subcategory of super: sustainable, ESG-based ethical funds and investment options.

The Vanguard/Investment Trends 2021 SMSF Investor Report found 48% of self-managed super funds would consider ESG investing if returns measured up.

A further 19% avoid companies that cause harm, 25% prefer to invest in companies that actively do good and 9% cited responsible investing as their number one priority.

Fortunately for the planet, sustainable investment options have been catching up with more traditional funds, closing the returns gap.

In an analysis of median returns of Balanced options (60–76% growth assets) over five years to December 31, 2021, SuperRatings found the median return for Sustainable Balanced options was 8.6% per year, just beating out the median return for comparable Balanced options of 8.5% a year.

Now that sustainable funds are no longer the losing option, those with an eye to the future may wish to think about investing in a fund that suits their ethics. Most funds will offer a sustainable option, but what that means will differ greatly depending on the company. Some sustainable funds eschew tobacco or weapons manufacturing, while others focus on renewable energy over hydrocarbons, or take a stand on nuclear energy by refusing to invest in uranium assets.

Marketforces offers a more in-depth look at which funds have fossil fuel investment exclusions and exactly what those exclusions mean, while Moneymag offers a list of the top 14 responsible investment funds.

As with risk appetite, deciding on where you draw the line is an entirely individual, personal choice, but at least now Australians have more options to vote with their dollar to create the kind of future they want to see.

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