Should I Go With My Company-Chosen Superfund?
Ever started a new job in Australia and been given a stack of paperwork?
In that stack, you’ll always find at least one form relating to your superannuation.
That’s because, when you start new employment in Australia, the employer is required, by law, to pay you superannuation, equivalent to 9.5% of your salary.
Suppose you earn $100k a year–lucky you! You will also have $9,500 placed into your superannuation account each year.
Your new employer, with some exceptions, will be required to ask you the following:
Do you have a preferred superfund?
Unfortunately, this is where things usually start to go wrong.
Because most people don’t have a preferred superfund; a lot of people don’t even know that this is even an option.
Or worse, they don’t even understand the question.
Over a relatively short time, the average Australian has collected multiple superannuation accounts. I’ve had clients come to me with a dozen superfunds, with the sole request to help them consolidate.
What are the chances these superfunds are positioned optimally for LONG-TERM benefit?
Before you start working on an answer, don’t worry, I’ve done the calculations for you.
The answer’s zero!
Why does this happen?
When you fill out all those new-job forms, and you don’t have a preferred superfund, your new employer will say: fine! Without skipping a heartbeat, they’ll enter you in their default fund which will have default investments.
That’s ok because basically all superfunds and investment are about the same, right?
Not all superfunds are the same.
Most are terrible; I wouldn’t touch most of them with a bargepole.
Why are most superfunds bad?
Many superfunds take on way too much risk and are not honest about it.
There are plenty of non-transparent fees, and sometimes fees that are so high they would make your eyes water.
Believe it or not, though, being in a rubbish fund is probably not the worse thing to happen to your super.
What could be worse than being invested in a lousy fund?
Superfunds are structured to be easy to use and allow for standardisation (that means less work for the company)—and they have done this very well. One area they have standardised to within an inch of its life is risk profile.
What is risk profile when it comes to superfunds?
A risk profile is a balance between two competing and opposite investment types.
One is the riskier growth investments, and the other is the more stable defensive investments.
Regulators understand this well; investment risk is balancing growth with stability.
Let me give you some examples.
Say you are 20 years old. You have 40+ years until you retire. Do you want more growth stocks or defensive stocks?
You want more growth, of course! Possibly nearly ALL growth.
The 20-year-olds that I know couldn’t care less about the ups and downs of the market over the next 5 to 10 years. As a long-term investor, you know that being in growth investments will pay off in the long run.
But, say, you are near retirement, maybe in the next couple of years. You are going to start drawing down on those investments soon. Can you afford a market meltdown to happen right when you start drawing down on your super? Of course not.
Conversely, you want your super to still grow over the coming years, so you will probably strike a balance between growth and defensive. That’s a good decision.
As mentioned above, the government has recognised this dynamic, and there is an agreed ‘profile’ based on your own ‘risk tolerance’.
These profiles fall roughly into the following categories:
- Defensive: 85% Defensive / 15% Growth
- Conservative: 70% Defensive / 30% Growth
- Balanced: 50% Defensive / 50% Growth
- Growth: 30% Defensive / 70% Growth
- High Growth: 15% Defensive / 85% Growth
- High Growth PLUS: 5% Defensive / 95% Growth
If you are in your 20s, you are more likely to be Growth or High Growth PLUS. If you are in your 50s, you are more likely to be in a balanced profile.
How does this relate to the default investment?
If you are still with me, you will have learnt that your employer has a default fund.
These funds have investment categories of risk (growth vs defensive) where they place YOUR hard-earned money. And if you let everything go into the default investment, it will go straight into a ‘balanced’ portfolio, no matter what age you are.
That’s right. Default = balanced investment = preferable for a 50+ year old.
Now, I’ve calculated the difference between investing over 30 to 40 years in a high growth PLUS fund vs staying with the default fund.
And the difference is worth multiple hundreds of thousands of dollars.
Not thousands, not even tens of thousands. Multiple hundreds of thousands.
It is, in other words, very much worth your while to take your superannuation seriously.
Now you know, what do you do?
Is it all doom and gloom? Absolutely not!
You can take charge; you can change your superannuation fund and investment preferences.
Here are some of my recommendations:
- Change your default investments to a risk profile that reflects your age and circumstances; the younger are you are, the more risk/growth investments you should have.
- Don’t just accept the default fund. Do some research; you can find some more thoughts on funds on my website.
- Seek out professional advice!
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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