Do you have the best super fund?

It’s a question I get asked regularly – most recently just the other day, prompting this article:

‘Do I have the best Super fund?’.

My first answer is always ‘I can’t give personal advice’… because, well, I can’t.

The regulator, ASIC, has very specific rules about the difference between ‘general’ and ‘personal’ advice. I can tell you what I think about an issue or investment, but I can’t tell you if it’s right for you, personally.

The difference? Personal advice would take things like your goals, objectives and risk tolerance into account. And lots of other things.

And it needs to be created using specific processes and delivered with some very specific paperwork!

So I can tell you what I think of different Super funds, but not whether you should (or shouldn’t) become a member of a specific fund – you have to take my ‘general’ advice, then consider if it meets your needs (or speak to a financial advisor directly, if you need extra support).

(And none of this is tax advice, either!)

I’ve said before that Super is stupidly complex. Way, way too complex.

There are rules for different types of contributions for different members based on different life circumstances.

There are rules about how much can be contributed, in what categories, and what tax does and doesn’t apply.

There are rules about how much money can be held in what specific accounts, and how each of those accounts are taxed.

There are rules about when the money can be accessed, and how much can be accessed (and in some cases, must be withdrawn).

And, believe it or not, even those are generalisations, and only just touch the surface.

I’d radically change (and simplify) the rules. But that’s a whole other argument… and article.

I’m going to focus, here, on how to think about approaching fund selection in general – I just won’t be able to address every possible permutation!

First, there are two broad fund types: so-called APRA-regulated funds (big, pooled funds, run by fund managers) and Self-Managed Super Funds (SMSFs).

And the first group can be split into two broad categories: Retail Funds and Industry / Not-For-Profit Funds.

Let’s talk, first, about why and when an SMSF can be attractive for most people.

SMSFs are wonderful for people who want to take control of their investments, who want to invest in things not easily accessed using traditional Super funds, and/or who have a fund balance (which can be pooled with other family members or close associates) which is large enough to keep costs (as a % of the fund balance) low.

And while it might be implied, the other consideration is whether you are likely to actually be good at picking investments! I think it’s something that most people can develop, in time, but just keep that in mind.

Generally, Retail and Industry funds have low fixed fees, and low fees as a percentage of the fund balance, but the latter can get pretty large if your fund balance does. In contrast, SMSFs usually have high fixed fees, but those fees tend not to change as your balance grows.

So you’ll find that variable fees suit smaller balances but fixed fees favour larger balances.

Where’s the cutoff? In short, it depends.

I have an SMSF. It charges close to $2,000 per year, plus I have to pay some regulatory fees.

In contrast, AustralianSuper (an industry fund) charges $1 per week, plus 0.1% of your balance, capped at $350 per year, plus investment fees between 0.05% and 0.52% of your balance (The ‘Member Direct’ option has a different fee scale, up to $180 per annum.)

Now, if I had $50,000 in my Super account, the $2,000 SMSF fee would be 4% of the balance.

By contrast, using AustralianSuper’s own example of their ‘Balanced’ option, the fees would total $387, or 0.77%.

If I had $5 million (trust me, I wish I did, but I don’t!) in my Super, the $2,000 fee would be 0.04% of the balance, and AustralianSuper would be an admin fee of $402 and investment fee of 0.57%: that adds up to a blended fee of 0.58%, which would amount to $29,000 per year.

Now, these are rough calculations, using extreme scenarios, it shows you the different impacts of flat fees and percentage fees.

It matters a lot, too, which investment option you choose within AustralianSuper… did I mention it’s complex?

The last wrinkle? The person running the SMSF has a lot of legal responsibility and paperwork to account for. It’s not hugely painful, but it is a bit of a hassle. You need to be up for the responsibility and the effort.

For some people it’s no big deal. For others it’ll be a deal-breaker.

Know thyself, dear reader: If the cost, time, interest and flexibility appeal to you, you might want to look into an SMSF. If not, read on for my thoughts about the traditional Super Funds.

Let’s return, now, to the two types of these Super funds: Retail vs. Industry/Not-For-Profit funds.

The difference, at least structurally, comes down to ownership and profit motive.

A Retail fund is owned by a for-profit business that wants to earn a buck by providing you a service for a given fee and keeping a small amount of that for itself, after costs.

An Industry Fund (so-called, because they were created by employer and/or union groups in each industry, like the Health, Building or Hospitality industries) is owned by members. Other non-Industry NFP funds that have different origins include Australian Retirement Trust and Vanguard.

(While I called them ‘Not-For-Profit’ funds, the industry calls them ‘profit-for-members’, but in practice it’s the same thing.)

So which should a member choose? Well, the numbers are pretty clear. Industry Funds, individually and as a group, almost always beat Retail Funds.

Why?

Well, investors as a group earn the market average return, by definition. And Super Fund members as a group will likely do more or less the same. So then, in aggregate, what’s likely to differentiate Retail and Industry Funds?

Costs.

And costs tend to be lower at NFP funds, accounting for a very large chunk of the difference in performance.

In short? If you can’t control returns (and as passive members of Super Funds, we can’t), then at least control the fees to maximise your chance of the best possible long-term return.

Sometimes, an individual Retail Fund will beat an individual Industry Fund, after fees.

Sometimes, it’s possible that Retail Funds as a group will beat Industry/NFP Funds as a group, after fees, in a given year.

But over the whole industry and over time? My money is squarely on Industry/NFP Funds. It’s just the law of averages.

So, if I didn’t have an SMSF? My money would absolutely be in an Industry or NFP fund, because I expect that probabilities will favour me doing better, after fees.

(Indeed, a few years back, I was part of the team that chose AustralianSuper as The Motley Fool’s default fund. We considered other for-profit and NFP funds, and went with AustralianSuper. And no, neither I nor The Motley Fool get any benefit of any sort from doing so, or by talking about it. We just reckoned it was the best choice of default fund for our team.)

Now, a couple of things:

If Retail Fund fees suddenly plummeted and were lower than Industry Fund fees, I’d change my mind. I don’t have an ideological preference, here, just a pragmatic one, based on the numbers.

And speaking of ideology: some readers will have an ideological opposition to their Super being in a fund with union involvement. Personally – and frankly – I think that objection is a little silly: we should invest our Super where it’s likely to get the best return, not with ideological fellow-travellers or away from ideological opponents. But… if I can’t make you think more pragmatically, that’s your call… and non-Industry NFP funds like Australian Retirement Trust or Vanguard might be worth checking out as very good alternatives.

Okay, but which Industry Fund? As I mentioned earlier, we went with AustralianSuper a few years back. It was (and remains) the largest fund, and had very low, if not the lowest, fees. And being the largest, it was likely to have the best chance of keeping those fees low, or lowering them further, so probabilistically it was our best choice at the time.

I am very happy with it currently being our default fund, though it’s probably time for us to do a review. But one of the best things is that other Industry/NFP Funds have relatively similar fee structures – so if there’s a lower fee option out there, it’s very, very unlikely to be meaningfully cheaper.

Which is also good news for members of other Industry Funds. The question I received this week was from someone in an Industry Fund, asking which one I’d recommend, compared to the fund they were already in.

As I said at the top, I can’t give personal advice, and the maths (see the fee example higher up) means that it’s possible that different funds are slightly better or slightly worse for different account balances, based on their mix of those fixed administration fees, administration fees as as percentage of funds, and investment management fees.

So fee-wise, any of the largest Industry/NFP funds are probably reasonably similar on fees, and any benefit from changing is likely small.

But… please check. There may well be some out there charging unnecessarily high fees – and the money is better in your pocket than theirs!

Phew… this is getting long. Did I mention Super was complex? If you’re still with me, thank you!

Let’s wrap this up.

Here’s how I think you should (generally) think about your Super Fund choice:

If you have a large enough balance (or the balance will be large enough in a few years’ time), and have the time, inclination and expectation that you can invest well – and want the flexibility that comes with the extra paperwork burden – an SMSF can be a great choice.

If you don’t want the time, hassle, stress and bother, and/or you don’t have an account balance that justifies the decent fee you’ll pay for an SMSF, an Industry / NFP Fund is be a great choice. And as long as you pick a decent-sized Fund, you’re unlikely to be paying materially more than another similar-sized Industry Fund when it comes to fees.

And Retail Funds? If you really like donating extra to the Australian financial services industry, then go for it! Okay, I’m kidding… a little.

These guys and girls are doing their best to grow your Super by investing well, but at the end of the day, history says you’re likely to do worse, after fees. Betting against both history and probability is usually a bad idea.

Me? I like the freedom and choice of my SMSF. But it only contains shares and a little bit of cash, so it’s not that complex. If there was a price-competitive Industry/NFP solution that allowed me to buy and sell just as I do in my SMSF, I’d probably jump at it to save me the paperwork.

Well done! You made it though the cook’s tour of the Australian Super system.

Sort of.

Don’t worry, I’m not writing anything more, today – but I will follow up soon with the question of ‘Which investment option(s) should I choose inside Super’.

Because, believe it or not, the way you invest your Super might (probably does, in many or most cases) have more of an impact on your final balance than the Fund you choose!

But that’s a whole other story. Until then!

Fool on!

The post Do you have the best super fund? appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.