I've been asked a couple of times in the last couple of weeks about what to look for in a superannuation fund. I haven't been able to recommend anything for quite some time, but I still keep getting asked this question. Note that when I say, 'I haven't been able to recommend anything for quite some time,' I mean that like most people, I am not legally able to recommend anything, not that there isn't anything to recommend.
Strangely, a lot of punters think that it's all about investment returns. A surprisingly large number of alleged professionals in the industry actually think the same thing. It's not, and going into the process of selecting a fund with this as your prime incentive is going to cause heartache.
So this is the latest rendition of my top ten things to look for in a new super fund. Do bear in mind that it's no substitute for proper advice.
1. Fees
Know how they're charged. Know how they're calculated. Know where each of them are.2. Fees
I mean it. Run a scenario over a year if you can, and use your projected balance as a guide. Spreadsheets are good for this.3. Fees
You can tell that I think that fees are important. Super fund fees tend to inversely correlate with performance, and I suspect that this is no coincidence. If you can keep these down, you're doing well. Look for the following fees:a: Administration fees
Can be charged a variety of ways, but in industry super funds, this is normally a dollar fee per week/month or even year.b: Investment management fees
Usually a very small percentage that is charged to the fund, not you. Obviously, not transparent, but on the plus side, your return is normally quoted NET of this. This can be quite confusing if your investment management fee is subject to a rebate which some are. Also, these may vary with your choice of investment option. Download your fund's investment guide for more information, if you are NOT using the default option.c: Buy/sell spreads
Will not apply in many cases. Do not believe a word the fund says about this not being a fee. If it applies, it is a fee and is being charged everytime you either invest, or change investment options. Usually, it will be quoted as a percentage, and usually as a percentage of the ACTUAL or NAV (Net Asset Value) unit price. If this is is the case: Double it - because that is what you are going to be charged. I've occasionally seen these correctly labelled as 'transaction' or 'switching' fees.d: Entry fees, adviser service fees and any arrangements involving commissions
Do not pay these under any circumstances. (Sometimes advisers will charge 'implementation fees' in place of entry fees. Avoid - they're exactly the same thing, even though execution is being done in different places) If you are dealing with an adviser, insist on fee for service and pay up front and not from your nest egg.e: Exit fees
Avoid ANY percentage based exit fee, although a dollar based withdrawal fee is usually unavoidable. Accept no more than $50 for a withdrawal fee.f: Other costs
Can be dollar fees or can be percentages. It doesn't matter. Know how they're charged! Know how they're calculated! Know where each of them are!4. Insurance coverage
What do you get as a default, or do you? Some funds make you apply for ANY amount of cover - avoid these. Some funds offer a pre-approved amount over and above default amounts - this will generally only be available to new members. Some funds allow you to 'rollover' insurance from other superannuation funds - a great feature. Try to get your hands on death (life), TPD and income protection if you can, and get as much coverage as you can without overdoing it - remember you have to pay a premium. There are some other little traps to this, but they're the key points.In most cases, you can apply for extra coverage. This is usually a long, drawn-out process involving a lot of paperwork, so it makes sense to get your insurance sorted first.
5. Insurance premia
The other part of this. It's fine to get a lot of coverage, but remember that you have to pay for it. Some of this is easily comparable: Death is pretty much death and is easy to compare, but expect to pay more for own occupation TPD compared to any occupation TPD. Expect to pay more for shorter waiting periods on your income protection and expect to pay more for longer benefit periods. Etc.6. TPD and income protection insurance benefits
Know what you can claim for. Sadly, (and quite cynically) the question is, 'How easy is it for me to make a claim?'7. Investment options
What can you invest in? Can you use more than one at once? Do they have rebalancing facilities? Do you absolutely need single-sector options, or share trading, or an investment menu that has hundreds of options? What happens with new investments? If you're invested in two different options, can you choose the one where your fees come out of, or where fee rebates are credited to?Not all of these will be as relevant to you, but all worth considering. Note that these days, funds only need to put details of their default investment option in their disclosure documents. You simply must look at their additional investment options on the small to medium chance that the default option isn't suitable for you.
8. Fees
Again? Yes. Look at the investment management fees for the options that you are thinking about. Again, some of these are easily comparable, especially with cash options, for example. Others are not, even if they invest in the same asset class. Expect to pay more for active management versus passive management, particularly with equities options.9. Go away and have a good lie down
Think about the different investment risks present in the investment options that you've been looking at. You don't know what investment risks these are? Aye caramba! Read up.Also, those things that say, for example, 'may have three negative years in every 10? This should be read as 'may have 30 negative years in every 100, and these can always happen all at once'.
10. Past returns
By all means look at past returns, but remember: Past performance is not a reliable indicator of future performance.Only after all this, will you be good to go.
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