What to do if your super fund is underperforming? The answer could save you 13 years of lost pay
The day underperforming super funds have been dreading has arrived.
Super funds have until 28 September to send out a “letter of shame” letting their members know they’ve failed a regulator-mandated performance test and suggesting that members should consider moving their money.
The pass/fail results (which you can also view through the Australian Taxation Office’s super fund comparison tool) bring a much-needed (and unprecedented) level of clarity to the previously cloudy issue of fund performance.
So what are your next stepsif you’re thinking about moving your super?
The ATO’s new super fund comparison tool is your friend
The super fund comparison tool is the best place to start weighing up your options. You can sign in with your MyGov account for the more useful personalised version. This version allows you to input your age and super balance (make sure you’re using the balance from your fund to get the most up-to-date balance number) and see how funds stack up on fees and performance for you.
In super, you don’t necessarily get what you pay for; high fees have been associated with lower returns. But the fund with the lowest fees isn’t automatically the best either. What you’re after is a strong long-term performer with competitive fees.
The performance results may all look broadly similar. It’s worth remembering, however, the Productivity Commission’s findings here. The commission calculated that the difference in retirement income between a typical full-time worker who had been with a bottom-quartile super fund and one in a top-quartile super fund would be the equivalent of a jaw-dropping 13 years of lost pay. Or, put another way, you’d need to work another 13 years to make up for your super fund’s poor management.
Don’t overlook insurance
One thing to weigh up, which the performance test doesn’t touch on, is the disability insurance in your super. Many people aren’t aware they’re paying for this insurance, but it can provide you with income if you suffer an injury or illness that prevents you from working again. The bundled death insurance will provide financial support for your dependants if you die early. Unlike life insurance outside of super, default insurance tends not to be underwritten, meaning you may not have to undertake medical tests to get this cover.
Frustratingly, not all the insurance offered by funds is equally valuable. Some policies make it much harder to claim if you’re working part-time, casually, in the gig economy, as a carer or taking time out of the workforce. Other policies apply more restrictive tests for hazardous occupations.
Trying to work out what cover a fund offers is a complex process, even for lawyers. If you think a restrictive term may apply to you, the best approach would be to contact the fund you’re interested in and ask if there are any restrictions on insurance for someone in your specific situation.
The good news
Relatively few Australians switch super funds, but the good news is it’s a much simpler process than many people believe. Some funds say you can join in as little as 15 minutes.
Super funds may not like having their underperformance laid bare, but it’s your money. You now have the most useful tool yet to see how your fund is doing with your future retirement income.
Be wary of the self-interested industry spin
Be wary of the claims from underperforming funds and some of the industry lobby groups. They are all clamouring to tell you they are still good funds despite the test results.We released research on what each of the funds said about their performance ahead of the test and they all gave themselves the tick of approval. It turned out that 11 of the funds in our sample failed when the independent test results were announced this week.
Funds have had plenty of time to prepare for the test; some made big fee cuts or merged with other funds to avoid failure. So you have to ask yourself whether those that failed deserve to manage your money.
Want to focus on ethics in your investing?
Some of the funds that failed have tried to deflect by saying they were pursuing ethical outcomes with their investment. The fact is some funds that passed also have the same ethical accreditation. So it doesn’t need to be a trade-off. A fund using ethical, social or governance (ESG) investing as a reason for failing really needs to take a look in the mirror.
The bottom line
Unless you have a specific reason to stay with a fund assessed as “underperforming”, you should think about switching to a fund that can better build your retirement income.
• Xavier O’Halloran is director of Super Consumers Australia