What's the best option for your super?
Industry funds, retail funds, super platforms and self managed super funds (SMSF's), there are so many options to choose from it can be a really difficult decision where to park your retirement nest egg. Let us examine the options and provide the skinny on what these funds offer.
What Are Industry & Retail Super Funds?
The main difference between retail and industry superannuation funds is what they do with their profits. Retail super funds return their profits to shareholders and investors whereas industry super funds generally return profits to their members. See below for more differences between industry and retail super funds.
Industry Super Funds
Industry superannuation funds were predominantly developed by trade union and industry bodies to provide for their members in retirement.
Originally the various super funds were exclusive to their industry but super choices have opened most of them up to anyone eligible for superannuation.
This is where the term “public offer” originated –industry funds are now open to the general public and no longer restricted to their industry.
Industry funds are not-for-profit funds; as a result they have historically charged lower fees on average compared to the big retail super funds, and profits are funnelled back into members’ funds. However this is changing. Some retail funds are now challenging this paradigm by introducing new low-cost products.
There are also concerns with industry super funds and how they operate. Some of these concerns are summarised below:
Trade unions tend to have a lot of control over industry super funds, how they are operated and ultimately their lack of productivity. This ‘influence’ was highlighted during The Royal Commission into Trade Union Governance and Corruption.
The amount of money paid to trade unions is particularly concerning. An industry report in 2017 highlighted that trade unions received over $18 million from industry super funds over a 4 year period. In January 2019, KPMG calculated that Cbus paid over $7 million to unions over a four year period ending in 2014. The operation of (1) trade unions and (2) investing people’s retirement savings are two separate activities and should be completely independent.
The lack of transparency and accountability with respect to investment performance.
And finally, given their scale, they should be reducing fees, not increasing them – a point which the Productivity Commission has made in its recent investigation. Find the recent report into super here.
Having said all that, industry funds tend to be a better option than retail funds. And if you are not going to use a super platform (or SMSF), then they may very well be the best solution for your super. Hostplus, Cbus and AustralianSuper tend to be the best performers in terms of investment returns. AustralianSuper has the lowest fees out of the three (by a reasonable margin) so its typically a preferred option.
Retail Super Funds
Retail super funds were developed by financial institutions and insurance companies to cater for people who were interested in investing and saving for their retirement. It’s fair to say the initial focus of these funds were wealthier white collar customers, typically in management positions.
Retail super funds offer investment expertise and personal service to their clients and charge a commission for that service. The shareholders of these publicly-listed companies expect to receive a return on their investment, and a portion the profits derived from the activities of retail super funds goes to the shareholders.
Large organisations such as banks and insurance companies tend to run Retail super funds.
Generally speaking, we have found that retail funds (e.g. AMP, BT, Colonial, MLC, etc.) invariably charge high fees that don't correlate to higher investment returns. This was confirmed by the Productivity Commission’s recent report into super.
Therefore, if you are in a retail super fund, it would be beneficial to review your arrangements and perhaps you may be better off switching (but you must consider any ancillary benefits and/or insurance before you do).
What is a super platform?
We find accountants often recommend establishing a Self Managed Super Fund (SMSF) as the most effective way to gain full control over how your super is invested. However most people don’t want the responsibility and compliance headaches that a SMSF can create.
A super platform is an excellent alternative to a SMSF. In fact, they are simpler, don’t come with any compliance obligations and are often lower cost, and yet they still give investors a lot of control over where and how their super is invested.
A super platform is a portal (super account) that helps you invest your super. It provides you with access to an extensive list of managed funds, index funds and domestic and international listed securities.
Good platforms will offer a list of over 600 managed investments plus all listed stocks (i.e. on the ASX and often NYSE/NASDAQ). Therefore, you have a very broad array of investment options.
The platform will also take care of all administrative requirements including reporting of super contributions, payment of tax, provide you with annual statements and so on.
The platform will also provide you with investment performance reporting so you can easily compare the performance of your super to relevant indexes – something that is more difficult to do in an industry fund environment.
In essence, a super platform is like an industry fund but with more transparency and flexibility.
At present there is a lot of downward fee pressure on platform providers. Fees in the US for example are a lot lower than in Australia. As such, we expect there will be a downward trend in fees over the coming years – meaning they will become even cheaper.
Netwealth, Hub24 and Macquarie are some of the largest independent platform providers in Australia. This means they have the most scale and therefore are arguably in the best position to maintain competitive pricing.
Benefits of a super platform
There are a number of benefits a super platform provides compared to industry super funds:
Full transparency which greatly improves accountability. You will be able to separately identify the fees you pay to the platform provider for administration of your super. If a different platform provider provides better service or lower fees, you can switch to it. You will also be able to identify fees paid to each fund manager – and hold each of them accountable for their performance. You have full control over who gets paid from your super and how much.
Full control over your investment methodology – if you want to invest your super using a 100% passive methodology, you can do that using a super platform.
Full control over your asset allocation. This is an investors most important decision because investors cannot control markets (returns), but they can control which markets they invest in. If you want to reduce your exposure to the US market for example, you can easily do that with a super platform. Contact us for a chat to learn more about asset allocation.
Self Managed Super Fund (SMSF)
As the name implies, an SMSF (also known as DIY super) is a private super fund that you manage yourself. So it’s no surprise that control is the number one reason people give when asked why they chose to fly solo. SMSFs give their members control over how their retirement savings are invested.
Setting up an SMSF involves creating a trust (a legal tax structure) with either individual or corporate trustees. Trustees manage the SMSF’s assets and are ultimately responsible for ensuring the fund’s ongoing legal compliance with superannuation and taxation legislation. That compliance includes annual auditing, reporting and taxation obligations to the ATO.
All members of an SMSF must also be its trustees. If a fund chooses to have a corporate trustee, each SMSF member must be a director of the company concerned. The company must be registered with the Australian Securities and Investments Commission (ASIC) and each director of that company must also be a member of its corresponding SMSF.
An SMSF can currently have up to four trustees/members, although there has been discussion about increasing that number to six in future.
Trustees manage SMSF funds by making investment decisions. It’s a legal requirement for SMSFs to have a documented investment strategy. This investment strategy should satisfy the sole purpose test and be used to guide trustee decision-making.
Some of the benefits of SMSFs
Greater flexibility with tax
Greater control over investments
Potentially lower fees on very high super balances
Some of the drawbacks of having an SMSF
The knowledge, time and cost required
Higher costs on lower super balances
Higher insurance costs
What is the difference between a super platform and an SMSF?
Members own their underlying investments in a super platform, but don’t need to be a trustee. People with a super platform are therefore not responsible for its ongoing administration and legal compliance. Super platforms are regulated by APRA rather than the ATO.
Super platform account holders often have access to wholesale and institutional investment products that SMSFs don’t, although their investments tend to be primarily in shares, term deposits and cash.
SMSF members have access to a wider range of potential investment assets, such direct investment in residential or commercial property, which are not available to people with a super platform.
Don’t bother unless you have a clear strategy
One of the problems with SMSF’s is that people have established them and subsequently done nothing with their monies since i.e. they have left their super invested in cash. In this case, they would have been better off investing their super in an industry fund.
Therefore, if you are considering setting up a platform account or SMSF, make sure that you have a very clear strategy on how to invest your super – or you are being advised by an independent financial adviser. If you don’t have a robust, evidenced-based, low-cost investment strategy, then use an industry super fund.
Similarly, if you think you might be tempted to make silly investment decisions (e.g. invest in higher-risk, speculative stocks), then refrain from setting up a wrap product or SMSF and stick with an industry super fund.
Super platform products are powerful and flexible but in the wrong hands, they can do more damage than good.
Don’t automatically think that the only way to gain greater control over your super is to set up a SMSF. A platform product deserves a lot of consideration and is often the best solution, particularly if you share our concerns with industry super funds.
A SMSF is only a better option if you want to invest in direct property, unlisted investments or have complex estate planning needs.
If you need any help, don’t hesitate to reach out to us for a chat.