Choosing a super fund

Introduction

Since 2005, employees have been able to choose their superannuation fund, which provides an opportunity for more control over investment options. It can, however, mean spending time and effort on financial education and comparing funds. There are three main types of super funds; accumulation, defined benefit and self-managed.

Accumulation funds

Accumulation is where the payment received upon retirement comes from the total amount contributed to the fund over an employee's working life with interest from investment, minus any expenses. This is the most common type of super fund, so employees have a lot of options to choose from with this type of fund.

One point of comparison is the fees and/or commissions charged on contributions. Some funds charge an exit fee, which is an amount deducted when you receive your benefits upon retirement or if you decide to change funds before retirement. As a consequence of compound interest, over 30 years your fund amount could be reduced by 20 per cent if the commission charged is two per cent rather than one per cent, for example.

Another important factor to consider is risk and return. One fund may have a higher risk so if it performs well in the financial markets, it will pay higher amounts of interest or dividends but the risk is that a bad investment might eat into your fund. Another fund may have a lower risk without accruing the same level of financial return over time.

Some members may also consider financial management within the fund as important. Generally, members who are more financially knowledgeable tend to prefer more control over their money. Some funds give members simplified choices of low risk, medium-risk and high-risk options, while other funds let members choose the proportion of money they would like to invest in different areas. Funds with more complex options may allow a member to choose to invest a third of their money in shares, a third in property and a third in cash management, for example.

Defined benefit funds

A defined benefit fund is a retirement allocation calculated by a set formula that includes factors such as length of service, age of retirement and average salary. This type of fund is often used by public sector employees and some large companies because it gives the employer a chance to invest the money as they prefer and reward their employees accordingly. The main advantage of a defined benefit fund is that the employer contributions are usually more generous than accumulation funds, which means that a long-term employee stands to receive a generous retirement benefit.

Some of the rules for using a defined benefit fund can be restrictive, however. It is compulsory for employees to make after-tax contributions and because the benefits are calculated by taking into account length of service, employees will need to stay in the public service or with the company to attain the most from their super. Recent employment trends show that long-term service will become less and less common, eventually making defined benefit schemes obsolete.

Self-managed funds

A self-managed fund is an investment strategy where the beneficiary is also the trustee of the fund. A trustee is a person who looks after the fund's investments. A self-managed fund must have fewer than five members and all members must be trustees.

The trustee needs to have a significant amount of money to invest to make the fund more worthwhile than other established funds but the greatest benefit of self-managing is that the trustee can tailor the investment to their specific preferences. Additionally, there are little or no fees or commissions for administration.

There are, however, some drawbacks of self-managed funds. The trustee must be able to manage the risk on their investments as a bad investment can cost a trustee some or all of their retirement benefits. The trustee must also ensure that their fund complies with legislation governing the operations of superannuation funds. Therefore, unless the trustee is already familiar with investment and legal compliance, it is difficult to self-manage a super fund while employed elsewhere.