How to give your super fund an annual check-up

It's easy to set-and-forget your super. You probably opened the account years or even decades ago and made some selections that suited your circumstances at the time. You might not have given it much thought since.

So, now's the time to return your attention to your retirement savings.

A few proactive choices, every so often, around how you want your money invested can make a huge difference to your super balance over time. The right options will depend on how long you have to retirement, your current and future ideal super balance and your risk tolerance.

After you log into your super fund's website, one of the first things to check is whether your fund is receiving any superannuation guarantee entitlements from your employer, if you meet the relevant criteria.

If you are 18 or older, or if you are younger than 18 and you work more than 30 hours a week, your employer should contribute 11% of your ordinary time earnings to your super fund. This rule covers full-time, part-time and casual employees.

There are four main features to understand about your super. These are: fees and charges; where the money is invested and whether this aligns with your values; as well as whether you will have enough and what it will pay you, in retirement.

Fees impact the returns

There are different relationships between fees and returns across different funds. Broadly, the fees and charges you pay will come down to the type of fund you have selected and its features.

At the most basic level, a balanced or growth index fund should cost between 0.1% to 0.3% of the balance a year.

"If all you're after is something simple with good returns, don't choose anything more expensive than this," says Brenton Tong, managing director of privately owned financial planning firm Financial Spectrum.

If you want your super to be actively managed, expect to pay between 0.3% and 0.8% in total. While industry funds are often thought to be the cheapest, some of them are more expensive than others, costing up to 1% of the balance in total. So, make sure you understand how your super fund charges its members.

"To put fees into perspective, a 0.5% difference in the fees you pay over your working life would amount to more than $120,000 in additional cost," says Tong.

Investment choice matters

Where the money is invested is just as important as the fees. If you haven't changed your option since you joined the fund, you are likely to be in the default pre-mixed investment.

"The pre-mixed investment option is good for the hands-off investor who wants to ensure they are appropriately diversified across the different asset classes, to balance out performance in different markets at any given time," says Prue Cheeseman-Goodes, wealth management director at HLB Mann Judd Sydney.

It's a good idea to periodically review how your super is invested to make sure it's appropriate to your situation. Log into your account through the online portal to find information about the fund's different investment options, and their cost and risk profile.

Your investment time horizon and tolerance to risk are the salient factors to consider when deciding how to invest your super. 
Property and shares are deemed to have a higher level of risk for higher investment return, whereas defensive assets, such as cash and bonds, are considered low risk and low return.

"Generally, younger people should have greater exposure to growth assets because they have a longer time horizon to withstand the ups and downs of financial markets," says Virgin Money Super general manager Christopher Sozou.

"People approaching retirement may have a greater focus on defensive assets to shield their nest egg from market volatility."

Familiarise yourself with your super fund's pre-mixed investment options for different risk profiles. Conservative options have a greater allocation to low-risk and lower-return assets.

Balanced options tend to invest around 70% of the portfolio in higher-risk and higher-return assets, while growth options invest 90% of their assets in higher-risk and higher-return assets.

How to assess the risk

As a rule of thumb, you have time to take on a little more risk if you have more than 15 years until you need to access the money. If you're on the cusp of retirement, you don't have that luxury and you should be investing more conservatively.

The idea is to match where your money is invested with your risk profile as well as your overall financial strategy.

"You don't want to be 100% in shares days before you retire and you don't want to be 50% in cash in your 30s and only earning a few percent each year," says Tong.

Some funds offer a lifecycle investment strategy as their default option.

"Well-designed lifecycle products can improve retirement outcomes by investing in high-growth assets during the fund member's younger and middle working years. The portfolio's risk exposure is gradually reduced the closer the member is to retirement," says Sozou.

Different funds have different names for their investment options - for instance, one fund may call its cash option 'stable'. But all options carry a standard risk measure, which is a label designed to help members compare risk across investment options.

The standard uses a scale from 0.5, which is very low, to 6, which is very high, to estimate the number of negative annual returns an investment option is likely to experience in any 20-year period. So, a very high-risk option is likely to experience negative annual returns six years out of 20.

Check out your fund's measure to understand its risk rating.

Before deciding to increase your super fund's risk, ask yourself how you would feel if there was a serious market correction and the value of your super dropped materially.

"Ask yourself what you would do if the value of your investments fell by 15% overnight," says Tony Davison, partner, wealth management, at People + Partners.

"Would you hang on and see it through or would you sell? Everyone has a different view and checking you're in the right setting in the first place is essential."

Consider long-term goals

It's also vital to consider current market dynamics before making any changes to your super fund.

For instance, it's generally held that the worst time to sell down investments and switch to cash, or to a more conservative option, is when markets are falling.

This is because this will realise any capital losses.

"In most cases, you would be better sticking it out until the markets recover, as history shows that markets will bounce back after a big fall. After the recovery, you can reconsider your risk profile and whether you should be making a switch," says Cheeseman-Goodes.

Before you switch, get advice about aspects such as insurances you may already have within your current super fund. Insurances will usually be lost when you switch funds. You may also be liable for of tax if you switch funds.

It's worth asking your fund about any low-cost financial advice you can access through it to help you weigh up the right choice for 
your circumstances.

Remember, super is not a stand-alone concept. It works in conjunction with the rest of your financial strategy to support your lifestyle in retirement.

If super is your main asset in retirement, you have to do everything to allow it to grow. So, make time once a year to check you're in the right investment option to support your long-term retirement goals and you're comfortable with your risk profile.

Savings can support your social values

It's important to take into account your perspective of the world and the global economy when you decide how your super is invested.

Increasingly, people are considering the environmental and social consequences of their investment decisions and opting not to profit from things like coal, gambling and tobacco.

Investing ethically, or with a social impact, means different things to different people. For some, it means no exposure to gambling or tobacco in their portfolios. For others, it means actively investing in clean energy.

What's important if you wish to take an ethical lens to your retirement savings is to first understand how they are invested.

There are a number of ways you can invest ethically through super. Some retail funds offer a socially aware, sustainable or ethical pre-mixed option, which can be an easy way to gain exposure to these investments. Or you can use a specialist ethical fund that aligns with your values.

"Do your research and read the investment option guides available on different funds' web sites," says Cheeseman-Goodes. "This will help you to understand the investment process, the sort of companies that are being screened out, whether there are any exceptions and why. That way, you can make an informed decision."

Review the fund manager's documentation to ensure what they've invested in meets your criteria. It is possible you are already in a super fund that offers an ethical or sustainable option. If your fund doesn't offer this category, explore some other options in the market.

What a difference $398k makes

Smart decisions can make a real difference to your super balance over time, as this example of a typical scenario shows.

In 2013, Steve and Melissa*, both 37, first started to look seriously into their finances. At the time, Steve worked in IT and earned $140,000 a year and Melissa worked part-time in accounting on an annual salary of $75,000. They have two children. Combined, they had $180,000 invested in their previous employers' default super funds, in balanced options.

The couple reviewed their financial strategy and decided to make some changes.

First, they moved their money to a lower-cost fund. They didn't choose the lowest possible option, rather they went with a good-value fund whose fees reflected their preference to invest ethically, with a bias to technology.

Steve also decided to make additional contributions to the fund, given he is the higher income earner.

Ten years later, their portfolio has returned 12.95%, while their old fund has returned 8.1%.

Taking into account Steve's additional annual $5000 contribution, their super balance is now $397,765 higher than it would have been had they not reduced their fees, made better investment choices and contributed extra.

*Not their real names

Get stories like this in our newsletters.