Low Cost Superannuation - June 2023
Are you an employee of a government Health department who contributes the standard 11% of your income to your Super? Or are your a business owner or GP sole trader who makes ad hoc contributions? Understanding where and how your money is invested is crucial. This article aims to clarify how Superannuation funds utilize Index/ETFs (Exchange Traded Funds) for cost-effective super investments. While super costs are decreasing significantly, it's important to question where the value lies for you as an investor.
So, how do we break down this challenge? First, we'll examine the costs. Then, we'll delve into what you're truly investing in and how it has performed historically. In summary: there won't be a one-size-fits-all "perfect fund" conclusion. Each of us has distinct needs and objectives and this article serves as an educational exercise for you as the reader, and also me as the adviser in writing and researching it.
If you are already bored, please just look at the table at the end to compare returns after costs. Or book a meeting and we will tell you if there is value in seeking advice or if you are fine where you are.
“Low cost is always best!”
While this holds true when comparing identical items, it's seldom the case. As an advisor, I emphasise transparency and functionality. These aspects enable me to provide sound advice based on my experience and philosophy. If your aim is to invest in super and let it grow for decades without constant concern, the fundamental “cost versus return” equation becomes most significant overall.
However, understanding what your fund invests in adds another layer to this seemingly straightforward risk/return equation. Yet, as a doctor juggling young kids and countless responsibilities, this aspect is likely not your top priority. Keep in mind that Superannuation is well-regulated. Despite the common tricks and misconceptions employed by those vying for your investment in this competitive market, you'll likely encounter similar offerings across most providers you can access directly.
Naturally, there's the option of establishing a Self-Managed Super Fund (SMSF) and venturing into uncharted territory, which carries substantial risk. But that's a conversation for another occasion.
Balancing Pros and Cons
As with any multifaceted problem, there's a multitude of pros and cons within each solution. This understanding can help shed light on various aspects you might not have previously considered.
In summary, the pursuit of a low-cost solution is commendable, but it's important to discern whether the cost aligns with value. This article aims to equip you with the necessary insights to navigate this intricate landscape and make informed decisions.
There are many resources available on this including the Moneysmart guide developed by our regulator ASIC.
Let's take a closer look at three low-cost industry super funds. Each fund will be discussed in more detail, and links to their websites will be provided for further information. While complete transparency might be a challenge, these funds offer insights into their workings. It's important to note that we frequently collaborate with these funds to assist our clients, but we maintain an nonpartisan stance without any affiliations, payments, or incentives, either direct or indirectly.
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Australian Super is the largest fund by a decent margin with 1 in 10 workers in Australia as a member. This gives them significant clout to drive down price on outsourced investment management. They also tend to have a good sized portfolio of unlisted infrastructure, property and “alternative assets”. Personally, this lack of transparency doesn’t sit well but they have had a good track record and low costs.
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Aware has its roots in a NSW Public sector fund (govt employees). It has since merged with Health Super and more recently WA Super and Vic Super. This process was completed earlier this year and Aware have been actively engaging with advisers to provide their members with advice as required.
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This fund was made wildly popular by Barefoot Investor based on the simple reasoning of it being the lowest cost super fund. It is the lowest “risk” fund in this list. Hostplus offer many other investment options but none are as generously priced.
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Retail funds are primarily used by advisers and offer massive choice in terms of investment options and managed funds, often offering whole sale options. They also offer structures such as Separately Managed Accounts that increase transparency and flexibility significantly over industry options. Other than direct property and off brand assets such as crypto that you would need an SMSF to access this is the highest level of choice you will find.
Unfortunately, I can’t tell you who this is as that would be too specific. Likewise I can’t say who the aggressive index manager is but they manage funds in the trillions so are larger than all other options put together.
The Lonsec fund was chosen as its simply a typical example of an actively manged “model portfolio” or “fund of funds”.
Cost Comparison
| Diversified Index Fund | Admin Fees | Investment Fee | Fee @100k bal | Fee @500k bal |
|---|---|---|---|---|
| Australian Super Diversified index | $52 + 0.21%** | 0.14% | $292 | $1,102 |
| Aware High Growth Index | $52 + 0.15% | 0.10% | $302 | $1,302 |
| Hostplus Balanced Index | $110.91 + 0.0165% | 0.04% | $134.50 | $360.50 |
| Retail - Aggressive Index | $275 + 0.18%** | 0.36% | $815 | $2,975 |
| Retail - Lonsec Active Growth | $275 + 0.18%** | 1.1725% | $1,627.50 | $7,037.50 |
Fees are either in flat dollar fixed fees or a percentage of funds invested. No performance fees included.
Admin fee can be made up of trustee fee, admin fee, expensive recovery etc etc.
** Sliding admin fee decreases as balance grows
Risk and Return - Stay true to label
When considering financial options, it's imperative to grasp the concepts of risk and return, as well as the distinction between passive and active investment styles. When considering any investment we start with what is the objective and the time frame. Are you building up savings for a house deposit in a year or so or are you investing for retirement in 30 plus years. Rather than go over old ground it’s worth reading this article from Vanguard on this subject.
Vanguard Asset allocation
Understanding "Balanced" Asset Allocation
The term "balanced" might seem straightforward, indicating a 50/50 split between growth assets (shares and property) and defensive assets (fixed interest and cash). However, super funds, particularly industry super funds, often employ the label "balanced" despite deviating significantly. In reality, a typical "balanced" fund can have an asset allocation of 70% or even 90% toward growth assets. Over the long haul, a higher allocation to growth assets yields greater returns, which becomes a distinguishing factor in fund selection.
This strategy also carries a psychological dimension. Less-informed investors often opt for the perceived safety of a "balanced" approach, even when young. This inclination to play it safe actually serves them well over the long term, as evidenced by the returns comparisons below.
Exploring MySuper Options
Upon joining a super fund, you'll often encounter MySuper options, which usually serve as the default choice. These options feature a dynamic asset allocation that adapts as you age. In your early years, when immediate access to super isn't required, the allocation leans heavily toward growth assets. As retirement approaches, this gradually shifts to more stable defensive assets. This strategy mitigates sequencing risk, preventing losses just before retirement withdrawals. While MySuper serves as a hands-off approach, we believe a more active role in super management is advisable, beyond checking it once a decade.
Risk (asset allocation) vs historical Return Comparison
| Diversified Index Fund | Growth Range | Target | 1 Month | 3 Months | 1 Year (p.a) | 3 Years (p.a) | 5 Years (p.a) |
|---|---|---|---|---|---|---|---|
| Australian Super Diversified index | 40-100 | 80/20 | 1.37% | 2.19% | 11.56% | 7.44% | 6.44% |
| Aware High Growth Index | 68-100 | 88/12 | 2.67% | 4.33% | n/a | n/a | n/a |
| Hostplus Balanced Index | 40-100 | 75/25 | 1.86% | 3.18% | 12.34% | 8.0% | 6.49% |
| Retail SMA Aggressive Index | 80-90 | 85/15 | 1.5% | 2.6% | 13.2% | 9.3% | 6.8% |
| Retail - Lonsec Active Growth | 75-85 | 80/20 | 0.71% | 1.58% | 8.27% | 6.56% | 4.63% |