Superannuation is simply a way of investing your money to fund your retirement. Employers are required to contribute 9.5% of your salary to your super. The contributions made on your behalf will then be invested in the investment option you have selected. Once you retire, you will be able to take these funds as a lump sum or as a regular pension.

There are four types of super funds. Retail and industry accumulation funds, employer/Government owned and self‑managed (SMSF). Generally, retail super funds are managed by for profit organisations such as the banks; industry funds are not-for-profit organisations; employer or Government funds are for their employees only; and an SMSF is run by the individuals. The focus of this article are the retail and industry accumulation funds.

Most people can choose which super fund to use, although a small number must use the one nominated in their workplace agreement. For those able to choose their own fund, broadly there are two main things to look for. The administration fees and the net returns of the investment option you think is right for you.

The administration fees will vary depending on your balance. For those with a balance over $50,000, you shouldn’t be paying more than about 0.2%.

While the administration fees are important, it is the net investment returns that will have the biggest impact on your final super balance. These net returns are a result of the fees and the proportion of growth to conservative assets.

To demonstrate the impact of net returns, let’s use Chris and Emma as an example. They are both 30yrs old, already have $100,000 in super and earn $100,000 per year. Chris is in the balanced investment option gets average net returns of 7% while Emma has selected the growth investment option and gets 8% annual net returns. By the time Chris is 60 he will have $1.3 million. However, Emma will have $250,000 more.

The difficult part comes when choosing the right fund and investment option. We won’t know which ones perform the best until after the fact. To make it more complicated, there are over 500 funds, and many have 15-25 investment options.

When choosing a fund, I suggest you go through the following steps:

  1. Make sure you won’t lose any insurance benefits that can’t be replaced if you move super funds.
  2. Make a shortlist of 2-3 funds that have administration fees of less than 0.2% (assuming you have a balance of more than $50,000). Hostplus, Rest, Australian Super, Unisuper, Sunsuper, Qsuper all meet this requirement, but so do many retail funds.
  3. Figure out what mix of growth and conservative assets you want. Generally speaking, the younger you are the higher percentage of growth assets you should have.
  4. Identify what type of investment option you are after. For some this could be the Pre-mixed high growth option or a low cost Indexed Balanced option, and for others it might a mix of 50% Australian shares and 50% International shares.
  5. Compare the investment fees and underlying assets for each of the applicable investment options for your short listed funds. Note that not all investment options with the same name are the same. For example, some Balanced funds have 60% growth assets and some have closer to 90%.
  6. Select a fund and/or investment option and move.

Regarding the investment options, the higher growth and higher risk ones (such as shares or property) should give higher returns than the conservative and less risky investments. However, it is not as easy as just choosing the highest growth option. You should also consider things like your age, other investments, your risk tolerance and your ability to withstand a market fall.

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About the Author
Phil Harvey is an independent financial adviser. In 2017 Phil set up his company Construct Wealth to help clients best manage their finances so they focus on what is important to them. He is a founding member of the Profession of Independent Financial Advisers and a tax financial adviser, registered with the Tax Practitioners Board.

General Advice Warning
This advice contains general information. It may not be suitable to you because it does not consider your personal circumstances. Phil Harvey and Construct Wealth are authorised representatives of Independent Financial Advisers Australia (AFSL 464629)