How to make sure you're not being ripped off by your super fund
Super is a bargain with the future. We put money aside now and trust that it will be there when we're older. When it works, that's great. But for too many people, at least some of that trust is misplaced.
The Productivity Commission last year found millions of fund members are losing out from flaws in the system, such as having unintended multiple funds and underperforming funds. Just addressing these two problems could collectively save members $3.8 billion a year and give a new job entrant today an extra $533,000 in retirement in 2064. Even a 55-year-old today could be $79,000 better off by addressing these issues.
So where are we being shortchanged and what can we do about it?
Too many funds
The commission found around a third of super accounts (about 10 million of them) are unintended multiple accounts that erode members' balances by $2.6?billion a year in unnecessary fees and insurance. Efforts have been made by government and the industry to reduce these extra accounts, but many people still have more super accounts than they need.
Xavier O'Halloran, a director of the advocacy group Super Consumers Australia, says recent government laws allowing inactive accounts worth less than $6000 to be automatically consolidated are a good start in addressing this problem. But if you have more than $6000 in a secondary account (maybe from a previous job), you could still be losing out by doubling up on costs.
You can check your super accounts by registering at my.gov.au and clicking on the ATO section. If you then go to the "super" tab you can see details of all your accounts including any lost super the tax office is holding on your behalf. You can then choose which fund you want to transfer your other accounts to and your money should be consolidated within a few days.
However, the Australian Securities and Investments Commission (ASIC) says you should check things such as exit fees and insurance coverage before you switch as you don't want to be worse off from the change. Cath Sharples-Rushbrooke, a certified financial planner with Advice Services, says some older funds may also pay you a defined benefit in the form of an income for the rest of your life, and you probably wouldn't want to switch and lose that.
ASIC advises against automatically consolidating into your biggest fund. The best option for you may be one of the smaller ones or another fund altogether. And be sure to notify your employer if you are changing your current fund.
Most consumers remain with the fund chosen by their employer, known as their "default fund". But that doesn't mean it's the best one for you - or even a decent fund. The Productivity Commission found at least 1.6 million accounts have ended up in underperforming funds.
O'Halloran says his group's research found more than 170,000 were defaulted into a poorly performing fund in 2017-18 alone and the default system is an "unlucky lottery" for too many Australians. He is urging the government to adopt the commission's recommendation of a "best in show" system that would stop people being defaulted into the dud funds.
Comparing funds isn't easy. MySuper funds (basically default funds) are now required to produce a two-page dashboard of information that makes it easier, but outside the default market O'Halloran says there are more than 40,000 fund options that are not required to do this.
Sharples-Rushbrooke says it is important to compare like with like as fund performance should also reflect the risks taken. A conservative fund isn't going to give you the same long-term returns as a more aggressive fund.
The Australian Prudential Regulation Authority recently produced "heatmaps" which looked at the overall performance of default funds and found that underperformance was evident across all risk profiles. Its data is geared more to pushing funds to improve, but consumers can also use comparison websites to see if their fund's performance stacks up against similar options.
Sharples-Rushbrooke says most people are also automatically put into the balanced option of a default fund, but this may not be appropriate if you're prepared to take more risk for higher returns (particularly if you are young) or want less risk (especially approaching retirement).
"It's important to understand how your money is invested and either talk to your fund or a financial adviser if you're not sure it's right for you," she says.
The Productivity Commission found an increase of just 0.5% in fees can cost a typical full-time worker around 12% of their account balance (or $100,000) by retirement.
It found an estimated four million member accounts worth around $275 billion were still held in funds with annual fees exceeding 1.5%.
"Super is not like other markets where expensive products generally indicate higher quality," says O'Halloran. "All the recent research has shown if you're paying a high fee, there's a good chance it will erode a lot of your investment returns."
He says the average annual fee is around 1%, so if you're paying more than that chances are you're paying too much.
Remember the scandal about banks charging dead people for financial advice? A similar problem occurs where fund members are paying for "zombie" insurance. This typically happens when you have more than one fund that is charging you for income protection insurance, which provides you with income if you're unable to work.
A payout is limited to 75% of your income. So even if you have three income policies, that is the maximum you can claim. The premiums on two of those polices are wasted money. You also generally need to be working to claim on income protection insurance. O'Halloran says some insurers also have restrictive "junk" terms on their policies, which can see up to 60% of claims being rejected.
Sharples-Rushbrooke says members should look at the insurance they're getting through their fund, what they are covered for, the features and benefits versus the cost. With members now able to opt out of insurance, some may be paying for insurance they don't need while others may not have adequate cover. From April this year, insurance won't be provided for new fund members under 25 unless they work in a dangerous job or request it. Funds will also cancel insurance on inactive accounts that haven't received contributions for at least 16 months, or accounts with balances below $6000 unless the member requests otherwise.
She says members should also check who they have nominated to receive the benefit from their fund if they die. Many are unaware that only dependents can receive super death benefits tax-free.
Sharples-Rushbrooke says it is a good idea to check regularly that your employer is paying your compulsory super and the amount is correct. The compulsory payments this year are 9.5% of your "ordinary time earnings" including allowances, commissions and some bonuses but not overtime. This should also be shown on your payslip.
She says many people also lose out by not making extra contributions when they are able to. Unfortunately, most people only take a real interest in their superannuation as they near retirement, and by this stage it is much harder to make up lost ground. As many contributions receive concessional tax treatment, it makes sense to get the maximum benefit when you can.