How vital are fees when choosing a super fund?

I’m not sure about you, but I don’t go to the cheapest hairdresser, I’ve been burnt before. On the other side, I also don’t pay thousands of dollars for my haircut either (although, maybe in Melbourne at the moment, I may have to in order to get a booking now that lockdown is over). I go somewhere where I feel the cost is reasonable, and I am happy with the outcome. With most things in life, the price is important but what should usually be most important is the value you get from that cost. This is the same way that you should be thinking about your investments and your superannuation.

 

Doesn’t lower fee’s mean more money in my super?

This is often a way in which people think, and it’s not necessarily wrong. Lower fees can often mean more money come retirement, but it’s not that simple. We need to look at the total return. If you’re paying 1% less in fee’s that can be great, but not if the more expensive investment outperforms the cheap one by 1.5%.

The most discussed cheap super option is the HostPlus Indexed Balanced Option. This fund’s popularity and investment are primarily due to the barefoot investor. Whilst this investment is cheap with investment fees of 0.06%. However, this is not the only factor we should consider when choosing it for our superannuation.

We first need to make sure that it’s appropriate for our risk profile. That means do we have the tolerance for the volatility that the growth assets within the fund will bring, or potentially, is this balanced fund below our risk tolerance and therefore, we may be missing out on long term returns by sitting below our risk profile. For instance, if you are a growth investor and chose the Indexed Balanced Option instead of the Shares Plus option, which is arguably more in line with the risk profile of a growth investor, you would have saved 0.93% in fees each year. That, however, only tells you part of the story as the Indexed Balanced Option over the last ten years averaged a 9.2% return whilst the Shares Plus Option averaged 10.64% for the same period. So we are leaving you potentially 0.51% worse off each year.

This also doesn’t mean that we hunt the best performing fund as historical returns don’t always correlate to future returns. However, investing in a manager with a proven track record is usually a good idea. The main point of this is that fees and fees alone should not be the basis on which you invest your super. Outside of fees and investments, other factors should be considered when choosing your superannuation.

 

What other factors should I consider?

As we’ve discussed above, fees and returns are significant, but other things need to be considered when deciding how we will invest our retirement savings. One of the more pressing issues with a lot of investors is not only the allocation of my investments in terms of how much I have allocated towards growth and defensive assets but also how my money is invested. Ethical and sustainable investing is becoming very popular as more and more people become concerned about the threat of climate change and other pressing social issues. If you are passionate about protecting the environment, then usually you would want your investments to reflect that and whilst most of them are getting better, not every super fund has an appropriate ESG option available to invest in. When looking at ethical and sustainable investing, what one person might consider being ethical and sustainable, another may not. So, it becomes crucial to see how those funds are invested in ensuring that they align with your wishes.

Another critical thing to think about when looking at what superfund option is best for you is what insurance options are available out there. This becomes especially important if you have insurance already within your current fund. You may not be able to get those insurances somewhere else due to medical issues you have had since getting those insurances. This becomes crucial to think about as once insurances are gone; they can be hard to get back. This is a necessary mindset to get into when looking at changing super funds as well, don’t look only to what you will gain but also to what you may be losing.

Other things that may be important when looking at your superannuation can be factors as simple as login access and how good the customer service is. However, the main point of this blog is to illustrate that there are many different reasons for choosing a particular super fund and investments. It’s all about choosing the best option for you, not necessarily what works for someone else or not for the simple reason of fees alone.

As always, if you have any questions, feel free to email me at zac@pekada.com.au.