AppleCheck provides the information you need to compare funds.
How to compare funds - 7 easy steps
If you’re one of the 5 million or so Australian workers who are able to choose the fund where their employer’s super contributions are invested, you need to be able to compare one fund with another. At the very least, you need to be able to compare the fund you’re in now with any alternatives that may be suggested to you.
So how do you compare super funds? To do the job thoroughly, it’s a 7 step process.
Step 1: Understand the different types of fund
Broadly speaking, you join a super fund either as an individual or as a member of a group, typically through your employer (either the employer's fund or an industry fund). You’ll sometimes see these described as retail and wholesale. The description doesn’t matter, but the differences do.
The main difference is that, in most cases, the fees for group membership are lower than for individual membership. So, if everything else is equal, your super will grow faster if you’re a member of a group.
The reason for the lower fees is that groups have greater buying power because of their size. That buying power may bring other advantages, too – like cheaper insurance premiums, automatic insurance cover without medical evidence and free access to education, advice and other member benefits.
Group membership generally applies if you’re in a public sector fund, an industry fund, or a company fund (whether it's run in-house or through a master trust).
The higher fees that generally apply for individual super membership (except in the case of an industry fund) normally include a component for commission payable to an adviser. That’s intended to cover the cost of ongoing financial advice. If that advice is important to you, the higher fees may be worthwhile.
The starting point, therefore, is to understand what type of fund you’re in and what type of fund it is you’re considering.
Step 2: Gather some personal information
Next, you need to gather together some basic information about your current benefits. You’ll find most of it on your annual member statement. You should also be able to access it through your fund’s website, once you’ve registered and been given a username and password.
The information to look for is:
- Your current account balance.
- The level of contributions made during the year.
- The investment option(s) you are invested in.
- The investment returns from those options over the past 3 to 5 years.
- The fees you pay. These may be shown as contribution fees, member fees, administration fees, investment fees or some other name. They may be expressed as a dollar amount, or as a percentage of your account balance.
- Your insurance cover, if any. You need to know how much, and what is covered (generally death only, or death and total disability, and possibly income protection).
- The premiums deducted from your account to pay for the insurance cover.
Step 3: Look into the insurance
If you have insurance cover under your current fund, that’s probably because you need it. If insurance protection is important to you, it’s probably the first thing you should check with any other fund you’re considering.
Why? Because the other fund may not provide the same type of insurance, or the same amount of cover. Or it may do so but only if you supply a satisfactory health statement or pass a medical examination.
The insurance cover itself is important, and so are the premiums you’d be required to pay for it. So check these things with the fund or its representatives. If you get a positive answer, move on to Step 4. If you don’t, it may be wise to give that fund a miss.
Step 4: Investment options and performance
Investment is important because, once contributions have been made, and fees and insurance premiums have been deducted from your account, it’s the future investment performance that will decide how fast it grows.
In your present fund, you’ve most likely got a variety of investment options you can choose from. The investment option you’re in now is either because you chose it or because you made no choice and are invested in it by default.
As far as any new fund is concerned, you need to make sure it has investment options that you can understand and that suit your personal risk and return profile. You should also be able to change options later on, at little or no cost.
Investment performance is obviously important, but remember that it’s future performance that’s really going to matter. After all, past performance is just history. It may give you some clues, but it’s not a reliable guide to what’s going to happen in the future.
The key is to check that the fund has a clear investment strategy, that it doesn’t rely on one person or organisation to make all the decisions, and that it draws on expert advice. Ideally, that means a ‘multi-manager’ investment process, where the fund trustee takes advice from a leading external investment consultant and spreads the assets across a range of specialist managers.
Step 5: Check out the fees
Over the long term, assuming you invest in a balanced investment option with a fund that uses the type of investment process described above, there isn’t likely to be a great deal of difference in returns between one fund and another. What can make a big difference, though, is how much of your money gets invested in the first place, and how much comes out in fees and charges along the way. Put simply, every dollar that comes out of your account in fees is a dollar that’s not invested and growing for you.
All funds charge fees, and some types of fees are more obvious than others. Don’t worry too much about fees that you’re only going to incur occasionally, but do look carefully at any ongoing fees that are deducted from your account every year. Also any fee that may be deducted from contributions, or from money transferred into your account.
Step 6: Think about the future
In an ideal world, the fund you choose now should still be the best fund for you throughout your working life and right into retirement. Unfortunately, it’s not always that easy. Some funds provide a much better deal than others in the event of you changing jobs, or leaving the workforce for a while, or retiring.
It’s a good idea to check what would happen, for example, if you were to become self employed or take a break from the workforce. Would you be able to stay in the fund, or would you have to choose a new one? And if you could stay, would the fees, investment choices, insurance cover and premiums be on the same terms as you had when you were an employee?
A similar question applies if you’re within sight of retirement. Some funds will allow you to remain as a member when you retire, and to draw an income from your account by way of an allocated pension or term allocated pension. Other funds either don’t have those options, or else provide them but with much more expensive fees.
Step 7: Any other benefits?
While we’ve covered the key issues, there are other factors that might play a part in your decision. For example:
- Does the fund provide education on superannuation and general investment issues?
- Does it offer limited financial advice (just in relation to your super) and, if so, who pays for it?
- Does it have a website that’s informative and easy to use?
- Does it provide useful educational tools and calculators?
- Does it have good communications – booklets, newsletters, factsheets etc?
Everyone’s different. Some of the aspects we’ve covered may be vitally important to you. Others may be of little interest. Before you make your decision, decide what matters most to you and give that the greatest weight.
Peter is 34, and has a white-collar job with a major retailer. He earns $55,500 a year, and his employer contributes 9% of that ($5,000 a year) to his employer's corporate super plan (within a leading corporate master trust). Peter’s account balance is $50,000, and that’s invested in the balanced option (which has about 70% of its assets in shares and property and 30% in cash and bonds).
Peter currently has 1 unit of ‘Death + TPD’ insurance cover. This will pay $100,000 if he dies or becomes totally and permanently disabled. To provide more security for his young family, however, he’d like to increase his cover to 3 units, i.e. $300,000.
There are no contribution fees in the corporate master trust, but Peter pays an annual member fee of $60, an asset-based administration fee of 0.15% and an investment fee of 0.45%. The $60 member fee is equivalent to an asset-based fee of 0.12%. So his total management fee for the year will be about 0.72% or $360.
The cost of his 1 unit of insurance is $58 a year. This equates to 58¢ per $1,000 of cover, which is a useful way of comparing the cost of insurance in other funds.
Peter’s total costs, therefore, are $418 a year ($360 in fees + $58 in insurance premiums).
When he’s offered choice of fund, Peter’s three main options are (1) stay where he is, (2) transfer to an industry fund or (3) transfer to a retail master trust. Most aspects of these funds can be compared fairly easily. The real difficulty is in comparing insurance. And the main problem here is that Peter won’t know whether he can get the higher level of cover he wants in the other funds.
With most retail funds, he will have to provide evidence of health. But he won’t be able to do that until he joins the fund. With most industry funds, he will be provided with 1 or 2 units of cover without evidence of health, but beyond that health evidence is typically required. While Peter doesn’t smoke and has a fairly healthy lifestyle, there’s still no guarantee that he’ll get the 3 units of cover he wants.
In the table below, we compare Peter’s costs under the corporate master trust with those of an industry fund (in the retail sector) and a retail master trust. For ease of illustration, we assume that he can get the same level of insurance cover in each fund.
Based on his current level of insurance, the corporate master trust is cheaper ($418) than the industry fund ($514). The retail fund is the most expensive ($1,155) by a large margin, mainly because its fees include adviser commission of $392 (contribution fee of 2%, plus an on going asset-based fee of 0.56%, plus insurance commission equal to 20% of the annual premium).
Cost Comparisons - Current Level of Insurance
| ||Corporate Master Trust ||Industry Fund ||Retail Master Trust |
|Contribution fee (%) ||Nil ||Nil ||2.00 |
|Member fee ($) ||60 ||60 ||Nil |
|Administration fee (% pa) ||0.15 ||0.10 ||Nil |
|Adviser commission (% pa) ||Nil ||Nil ||0.56 |
|Investment fee (% pa) ||0.45 ||0.63 ||1.31 |
|Total annual fees ($) ||360 ||425 ||1,035 |
|Premium for $100,000 cover ($ pa) ||58 ||89 ||120 |
|Total annual cost ($) ||418 ||514 ||1,155 |
|Less: Total adviser fees ||Nil ||Nil ||392 |
|Total issuer fees ||418 ||514 ||763 |
Cost Comparisons - Higher Level of Insurance
| ||Corporate Master Trust ||Industry Fund ||Retail Master Trust |
|Total annual fees (as above) ||360 ||425 ||1,035 |
|Premium for $300,000 cover ($ pa) ||276 ||323 ||256 |
|Total annual cost ($) ||636 ||748 ||1,291 |
|Less: Total adviser fees ||Nil ||Nil ||456 |
|Total issuer fees ||636 ||748 ||835 |
At the higher level of insurance cover of $300,000, the corporate master trust is still the cheapest. The retail master trust is still much more expensive, again mainly due to the adviser commission ($456).
The returns of the balanced options in the corporate master trust and the retail master trust were roughly the same over the past 3 and 5 years. The industry fund, however, performed much better, by about 1% per annum over 5 years, but only slightly better over 3 years. The main reason that it performed better over 5 years was that it had a lower allocation to international shares and higher allocations to Australian shares and property over the period, when international shares performed much worse than the Australian sectors.
Over the long term, investment returns of balanced investment options should be quite similar (allowing for fees) provided the funds have good investment advisers and an efficient investment process.
Peter should certainly take an interest in recent performance, but like all investors he needs to remember that past returns are generally not a good guide to future returns.
In assessing his options, Peter should also consider what happens if he leaves his current employer. If he is still in the corporate master trust, he will be transferred to its ‘retained benefits’ division. There the asset-based administration fee is 0.45% (an additional 0.30%). As all other fees remain the same, his total management fee would increase to 1.02% or $510 a year. Unfortunately, the fund will not accept contributions from his new employer.
Peter could continue his new insurance cover of $300,000 (but not increase it) in the retained benefits division. However, the premium would increase by 50% to $414 a year. Peter’s total costs, therefore, would be $924 a year ($510 + $414).
What Peter needs to do is to compare the costs and features of his new employer’s fund with the retained benefits division of his current fund as there may be a strong case for transferring all of his super to the new fund.
Generally, most industry funds and master trusts will allow you to remain as a member if you change employers, or become self employed or cease work completely. However, the fees and other conditions don’t always remain the same. Again, that’s something to check carefully.
It’s easy to see that comparing funds can be complex. The right choice isn’t always obvious, so many people would be well advised to seek professional advice.
The retail master trust we analysed already has a fee built into it for ongoing advice. If Peter were to join it through a financial adviser, he would most likely pay a fee for the initial advice as well as the fee for ongoing advice.
Provision for some limited financial advice is built into the fees of the corporate master trust and the industry fund. This isn't the case with all industry funds, but it is a growing trend.
© Chant West Pty Limited (ABN 75 077 595 316) 1997 - 2013. You may only use this document for your own personal, non-commercial use. This document may not be copied, reproduced, scanned or embodied in any other document or distributed to another party unless you have obtained the prior written consent of Chant West to do so.
The information above is based on data supplied by third parties. While such data is believed to be accurate, Chant West does not accept responsibility for any inaccuracy in such data. Past performance is not a reliable indicator of future performance. The products, reports and ratings do not contain all of the information that is required in order to evaluate the nominated service providers, and you are responsible for obtaining such further information.
This information does not constitute financial product advice. However, to the extent that this document may be considered to be general financial product advice then you acknowledge that you have been provided with a Financial Services Guide
and Chant West warns that: (a) Chant West has not considered any individual person’s objectives, financial situation or particular needs; (b) individuals need to consider whether the advice is appropriate in light of their goals, objectives and current situation; and (c) individuals should obtain a Product Disclosure Statement from the relevant fund provider before making any decision about whether to acquire a financial product from that fund provider.