Not many of us pay much attention to our superannuation, but did you know just improving the performance of your super fund by 1.0% per annum could increase your superannuation balance by more than 20% over twenty years?
And there are some easy ways for all of us to ensure that while we are living overseas our super is generating the best possible returns.
The Correlation Between Management Fees and Performance
I have written a number of times about why investing in index funds generates better returns than investing in actively managed funds (The Truth About Managed Funds & Index Funds).
An index fund is a fund with a low management fee that only endeavours to match the performance of the underlying share index by holding an investment portfolio that closely resembles that particular share index.
Actively managed funds are funds with a higher management fee where the investment manager seeks to outperform the relevant index, by actively attempting to pick stocks they believe will outperform the relevant index. However in my article The Truth About Managed Funds & Index Funds I discuss how, on average, index funds have been demonstrated to outperform actively managed funds, and are strongly supported by the world’s most successful investor, Warren Buffet.
These conclusions were also confirmed in a report commissioned by the Industry Super Network (Supernomics, 2010). This report stated that “the more you pay for superannuation, the less you get : the relationship between price and performance in the superannuation market is negative. On average, for each additional 1 per cent of assets pa paid in fees and commissions, net returns fall by almost 1.5 per cent.”
While I am the first to acknowledge that given the report was funded by Industry Super Funds, and statistics can be easily manipulated, the findings concur with many other studies carried out over the years.
Partly due to the lack of correlation between management fees and improved super fund performance, the Australian Federal Government announced in 2011 changes to the Australian Super Industry as part of the Stronger Super reforms. These reforms required that employers pay default superannuation contributions to an authorised “MySuper” product.
MySuper accounts offer the following :
- lower fees (and restrictions on the fees you can be charged)
- simple features so you are not paying for services you do not need
- a single diversified investment option or a lifecycle investment option
From 1 January 2014, if you had not chosen a superfund, your employer must pay your super into a superfund that offers MySuper. However, if you were in an existing default fund (ie. a fund that your employer has chosen) your superfund has until 1 July 2017 to transfer your balance into a MySuper account.
Investment Options For MySuper Funds
As I mentioned in the last section, you have two options with a MySuper account – either the single diversified investment option or a lifecycle investment option.
MySuper : Single Diversified Investment Option
With this option, your money will be invested in a standard mix of investments with the same risk-reward balance for the entire time you are with the fund. What this means the proportion of growth (eg. shares) and defensive investments (eg. cash) will not change over time. Usually the mix is approximately 70% growth and 30% defensive.
MySuper : Lifecycle Investment Option
With this option, the proportion of your money invested in growth investments will change over time. The younger you are the higher the proportion of your funds that will be invested in growth assets, and the older you are the lower the proportion of your funds that will be invested in growth assets. As growth assets tend to be more volatile by nature, the older you get the super fund will reduce your risk by switching your money into less risky (or less volatile) assets to protect the super balance you have built up over your life.
What You Should Do To Maximise Your Super Fund Performance
The first thing you need to do is check with your superfund manager what superfund your money is being held in. You should ask them what fees they are charging, and whether this is the MySuper fund option. Now, you do not need to choose a MySuper fund option, but as the Supernomics report (mentioned earlier) found, there is no correlation that suggests higher management fees improve the performance of your superannuation investments. If you are completely clueless when it comes to finance, then the MySuper fund option is a great place to start. If you know what you are doing look at other superfund options that attract lower management fees, industry superfunds, or discuss with a professional advisor.
Don’t let the funds management industry steal money from your retirement!
If you want to understand more about improving the return on your superannuation, view the video below. Julian Morrow (of the Chaser fame) seeks financial enlightment on improving the performance of superannuation.
Disclaimer : The information contained on this website is intended only as general commentary and does not purport to be comprehensive. No warranty is provided as to the accuracy. It should not be regarded as tax, financial, or legal advice. Remember, the value of an investment can go down as well as up, and you should seek professional advice that considers your personal situation and country of residence before taking action.