5 Top Tips when Selecting a Default Super Fund for Employees
Decades of working and what will anyone have to show for it? Once they’ve retired, what will support them now? Though they might no longer be working where will the money come from?
This is where superannuation steps in. Superannuation is where a retirement fund sits once employees are working and eligible to receive contributions to said fund. Essentially it is a pool of money retirees will dip into once they’ve ceased with their employment. This is the exact reason why a super fund should never be taken lightly, the choice an employer makes today when selecting the default super fund can significantly affect the amount their employees may end up with at the end once they leave the work force. That pool of money is better off overflowing and being filled to the brim so it doesn’t dry out as quickly and leave the retiree with nothing.
If employees are eligible for a choosing a superfund, the employer is legally obligated to provide them with a default fund if they decide not to make a choice of their own. It is an important decision for the employee, as it can make a significant difference to their overall nest egg.
Superannuation is currently 9.5% of an employee’s salary. Employees who are eligible will be those earning a minimum of $450 per month over the age of 18 OR those under the age of 18 are eligible if they work a minimum of 30 hours per week. Employers need to ensure these contributions are paid into the employee’s super fund every quarter into their nominated account.
We understand the default Super fund employers select can make a real difference to what an employee may end up with when they retire. Small differences now can be huge differences over time. In order to help businesses, make this decision, 5 top tips have been compiled to assist in the decision-making process.
1. The type of default fund can make a world of difference
Different types of funds will carry various advantages and disadvantages. Researching and understanding which type of Super Fund is suitable is important in order to meet the employee’s requirements.
2. Get acquainted with the legalities
There are laws and standards regulating Super Funds. The default fund selected for the employees must meet these legal obligations and be registered by the Australian Prudential Regulation Authority to offer the MySuper option as well as providing life and permanent disability cover options for members.
A way employers can check if the super funds they have in mind meet the eligibility criteria is to access the website www.superfundlookup.gov.au to see if the potential funds are compliant. The website also provides a list of all those funds which are compliant in case employers want to consider more options.
Though against the law to incentivise, some super funds may still attempt to persuade employers. Keep an eye out for any incentives such as discounts on their products and services, offering vacations or even something small such like passes for events and shows. These are all considered by law as incentives and are illegal, so be aware.
The MySuper option mentioned previously, is a type of account all funds must offer in order to be considered compliant. It is an account made for those who don’t want to choose and are not actively engaged with their super fund. Essentially, it is a simple account with the basic features and fee restrictions so members aren’t paying for features they do not want.
Always compare fees and consider any additional charges for services. By understanding what and how much members are going to be charged compared to the features and rewards provided, this can save employees a significant amount in the long run.
3. Know exactly what is being charged
There are a variety of fees and these are usually just subtracted from the super fund account directly, so understanding what might be charged and the different fee structure can help employers decide if the fees balance out the services provided. Keep note that some fees are percentages as opposed to a dollar amount.
People often assume lower fees automatically equates to bigger savings. Unfortunately, that is not always the case as some lower priced funds do not actively manage the super accounts and just leave the funds there in hopes the account will provide a good return even though little time and effort has been invested. It may be in the employee’s best interest to choose a fund where the account fee may be a little higher, but the account is actively managed, ensuring the best possible result.
Some typical fees employees may encounter in a super fund are:
Administration fees: These are the fees for the operation of the account and to cover the costs of keep the super account running.
Advisor fees: Fees charged when members require the advice from the super funds advisor over the employee’s super as well as other investment advice. There may also be a commission fee charged if they recommend certain investments to members. Keep in mind the super advisor can only provide tips in relation to the current super account and super fund, as well as future approaches or strategies for that specific account. They will not advise the employees on which super fund may be in their best interests.
Buy/Sell Spread: Usually super funds do not allow members to make any withdrawals from the super account unless they meet certain requirements. However, in the case where members can make withdrawals there are fees as a result of those transactions.
Contribution fees: Some super funds may charge employees a one-off fee per transaction when they may voluntary contributions into their super account.
Exit Fees: Super funds may charge members a fee for leaving the super fund.
Indirect Costs: There are costs the super fund may pay to third parties/external providers who have an effect on the super fund investment and these are usually investment managers
Insurance Premiums: Life insurance, Income Insurance and Total and Permanent Disability Cover can be provided through the super fund at a cost called an Insurance Premium. This fee covers the cost of the insurance cover through the super fund and is usually deducted from the super fund account.
Investment Fees: Depending on if the employee chooses different investments options- such as investing some of their funds into property, shares or just simply in cash there will be varying fees for the management of these investments.
Switching fees: Some super funds will charge members a fee if they decide to switch and change their investment options.
Employers can request a fee schedule and clear explanation of what the employee is paying for.
Select super funds which have displayed a track record of good performance over at least the past 5 years. Do not solely focus on the previous year’s winner as it is likely their fees will be much higher as a result. By researching the super fund’s performance over the long-term and the return achieved, this can provide an indication of how future return and performance may be. Though that is not to say past performance is a guarantee for future return. Review the investment performance of the super funds being considered, check if there is a variety of investment options available and if there are additional extras available which employers believe may be beneficial and relevant for employees.
4. Performance. Performance. Performance.
In the ideal scenario, a super fund will have strong performance and low fees, though it may not be realistic enough. Super fund performance is a result of fees and account management. No many would want a super fund which displays good performance but charges excessive amounts in fees. The latter is true for this too, low fees but poor super fund performance is less than ideal as well and employers should seek for something that provides a balance.
When checking the performance figures, employers should ensure they are factoring in taxes and fees in order to provide a more accurate display of performance. A super fund is a long-term investment so doing some research can make a real difference at the end of the day.
5. Optimise Your Choice using Comparison Services
Comparing funds will allow a more holistic view of what options are more relevant to employees. An online service called AppleCheck allows for the comparison of multiple superfunds simultaneously online. It displays the different types of funds and the cost of certain fees members may be charged such as administration fees or investment fees, what insurance covers the fund provides as well as the cost, organizational performance anywhere between 1-10 years and information regarding quality. It is a free service employers can use to weigh up the options before making a decision.
It is up to employers to decide what they believe best addresses their employee’s needs as these small differences now can make big differences over time. If still in doubt about how to best cater for every employee’s best interests, it’s usually best to seek out a well-rounded fund. This means well-rounded in fees, services, investment options and performance.
As with any choice there will be pros and cons, it just comes down to what will be in the employee’s best interest. Hopefully these tips will be able to help employers explore their options and come to a final decision.
If you want a more in depth guide to superannuation, check out the ATO guide to setting up super for your employees.