Never reviewed your super? Here are a few steps to get you started
Reviewing your super is a small investment of time that can result in a large return.
Superannuation is one of the most effective vehicles for Australian investors saving for their retirement. It has favourable tax rates, compulsory contributions going in from employers, and difficult conditions of release meaning no temptation to access it prior to retirement.
If you’ve never reviewed your super, here are a few steps to get you started. Small changes can have a meaningful impact to your retirement outcomes in the future.
Take stock of your super accounts
If you’ve had multiple jobs, you may have multiple super accounts. You’re able to see all super accounts that are linked to your TFN through myGov. Many superannuation funds have administration fees which are flat fee, instead of percentage based. Paying two or more of these administration fees is an unnecessary drag on your account balance. Consolidate your accounts can have a big impact on your retirement outcomes. Follow the below tips to guide you in picking which fund to keep.
Review your insurance
When you or an employer opens a super account on your behalf, default insurance is added to the account. These insurances do not take any of your circumstances into consideration, so it is likely that you are over or under insured. It’s worth reviewing to ensure that you’re not paying too much or too little for your insurance. If you are paying for insurance that you don’t need it can have a significant impact on your total return outcomes.
There are three main types of insurance in super – Income Protection, Life Insurance and Total and Permanent Disability (TPD). These insurances may or may not be relevant to your circumstances. In general, the considerations are the following:
Whether your employer (or yourself) already cover these outside of super.
Whether you have dependents – if you don’t – who would be the beneficiaries of a life insurance policy? Determine whether it is necessary.
The level of cover – MoneySmart has an insurance estimator, but you can also seek professional advice regarding what level of cover is sufficient.
Take a closer look at your asset allocation
Roger Ibbotson, a Professor of Finance, author and founder of Ibbotson Associates summed up asset allocation decisions pretty well. He said that on average, 90 per cent of the variability of returns, and 100 per cent of the absolute level of return is explained by asset allocation.
What Ibbotson meant by this is that the mix of assets that you have in your portfolio is a key factor in your returns. Asset allocation is a tight rope for superfunds. They have to remain scalable, while appealing to the risk and return expectations of different life stages, incomes, and objectives.
It’s important to understand the asset allocation mix that you are invested in, as it will determine your retirement outcomes. If you’ve never reviewed your super before, it is likely that you have been placed in the ‘balanced’ option.
‘Balanced’ is not a universal definition, so it is important to understand what your Super fund considers ‘Balanced’. You can have up to 20% differences in allocations to asset classes, which means that you’ll be comparing apples with oranges in terms of performance and fees.
Take for example, Australian Super’s Balanced option – it can hold a range of Aussie shares between 10 and 45% - it currently holds 21%. A balanced fund with Rest Super can hold between 11-21% Australian shares – it targets 16%. Then – you look at QSuper’s Balanced option – they’ve got 9.6% in Aussie equities. There are additional discrepancies in the allocations to each asset class in each option. It is important to understand the underlying holdings because over a time period of 30-40 years, a misallocation at an early stage could cost you hundreds of thousands of dollars.
If you need some help with asset allocation, listen to our portfolio construction episode on Investing Compass.
Don’t panic
In 2020, the Morrison government brought in legislation that required superfunds to meet an annual objective performance test. The purpose of this was to root out underperforming super funds. Those that underperformed were not able to accept new members and had to inform current members of the underperformance. But – is this a good thing?
One thing to remember with superannuation is that especially for aggressive funds, the fund managers are basing their allocations on long term horizons. What this legislation does is punish superfunds for underperforming over the short term and discourages this long-term outlook. There are concerns that it will encourage closet indexing. Closet indexing results from superfund managers who fear diverging too far from the index. We could see the professional managers running the superfund behaving a lot like the index, as they avoid assets like private equity, job-creating infrastructure projects, early-stage technology companies, venture capital and illiquid assets that perform differently.
What should investors do about this? There’s nothing that mandates that you must remove yourself from investments if they underperform. There is nothing that says that a one or even three-year return is the final determinant of your retirement outcome. Switching funds like this can be to the investors’ detriment – we call this impact the behaviour gap.
We conduct a study called ‘Mind the Gap’. We look at the return achieved by a fund and then we look at the return received by an investor – these are markedly different. The fund return is based on the underlying assets in the fund. The investor return is based on the inflows or outflows of actual investors deciding to buy into a fund or sell out of the fund. Those inflows and outflows have no direct impact on the performance of the fund, but the timing of your investments have a huge impact on the return that you get.
In 2013, we looked at 10-year returns and compared the average return of funds and the average returns of investors. We looked at global share funds in the survey and found that the average return over 10 years was 8.77%. Then, we looked at the average return that an investor got. It was 5.76%. The difference of almost 3% is a gap that occurs purely due to poor decisions made by investors.
This is one of many studies that show this impact. It’s important to remember because it can be tempting to switch and chase those returns.
Don’t look at performance without context
We have heard the phrase ‘past performance is not a reliable indicator of future performance’ ad nauseum – it’s the truth. Every year, when the list of top performing superfunds are released, the top performers see huge inflow. I had a look at the top ten performing super funds month by month over the last year – it changed almost every single time. This is why performance in the traditional sense doesn’t have a weighting in Morningstar’s fund research methodology – meaning – they don’t rank funds based on their past performance.
What is important is relative performance compared to the fund’s benchmark. Super funds will have an investment objective that they are looking to reach, and this is where you can see how they’ve stacked up against this. We can use Australian Super as an example. Looking at the high growth option, the investment objective is to beat CPI + 4.5% over the medium to longer term. It recommends a minimum investment timeframe of 12 years.
When we look at performance – it has achieved that. It has achieved 11.7% p.a. over a 5-year period, and 10.64% p.a. over a 10-year period. Based on relative performance to its benchmark, Australian Super has achieved its objective.
Reviewing your super is a small investment of time that can result in a large return. Start with these steps to get your super working for you and set yourself up for a comfortable retirement.
