With total superannuation assets valued at over $3.3 trillion at the end of the June 2021 quarter, for most Australians their super is now the largest financial asset they own, excluding their house. As a result, selecting the correct super fund has become one of the most important financial decisions you will make in your life. Your choice of fund and underlying investments can have a considerable impact on your superannuation balance and subsequently your retirement. It is therefore very important to understand the different types of Superannuation funds available in the market so that you can start to make an informed decision as to what is most appropriate for you.
Types of super funds
There are two ways superannuation fund balances are generated in Australia. These are known as accumulation funds and defined benefit funds.
Accumulation funds grow or 'accumulate' over time. Their value depends on the money that you and your employers contribute, combined with the investment returns generated by the fund after fees and costs are deducted.
Defined benefit funds
A Defined benefit fund’s value is not determined by investment returns like Accumulation funds, but instead are determined by a formula. While different defined benefit funds have different formulas, typically, your benefit is calculated using the money contributed by you and your employer, combined with your average salary over the last few years before you retire, and the number of years you worked for your employer.
Super fund categories
Now that you know the difference between accumulation and defined benefit funds, we can now look at the different types of super funds available in the Australian market. Most super funds available in Australia are accumulation funds. Additionally, almost all super funds will fall into one of these five categories – retail, industry, public sector, corporate or self-managed.
Retail super funds
Retail funds are usually run by banks or other financial institutions and are open to all investors.
They use an administrative platform with access to a wide range of investments options including listed Australian and International shares, ETFs, term deposits and managed funds.
Most are medium to high cost, but many now offer a low-cost or MySuper (see below) option.
They are usually accumulation funds.
The company that owns the fund retains some profits.
Industry super funds
Industry super funds were initially created to cater to workers in single industries across multiple work sites, but the majority of larger industry super funds are now open to all investors. Smaller funds may still however only be open to people working in a certain industry, for example, health sector workers.
They usually have a limited menu of pre-mixed investment options, including a MySuper (see below) option. However, some industry funds now allow members to select a limited selection of shares, ETFs and term deposits for an added cost.
Generally, they are low to medium cost.
They are usually accumulation funds but there are a few older industry funds that still have defined benefit members.
They are profit-for-member funds, which means profits are put back into the fund.
Public sector super funds
Public sector funds are for federal and state government employees. GESB is an example of such a fund.
They usually have a limited menu of investment options, including a MySuper option.
They generally have low fees.
Newer members are usually in an accumulation fund. Many long-term members have defined benefits.
They are profit-for-member funds.
Corporate super funds
A corporate fund is arranged by an employer for their employees.
Some large companies operate a corporate fund under a board of trustees who they appoint, whereas smaller corporate funds may operate under the umbrella of a large retail or industry super fund but are only available to that company's employees.
The range of available investment options can differ between corporate super funds.
They are generally low to medium cost funds for large employers but may be high cost for small employers.
Some older corporate funds have defined benefit members, but most others are accumulation funds.
Corporate funds run by the employer or an industry fund will usually return all profits to members. Those run by retail funds will keep some profits.
Self-managed superannuation funds (SMSFs)
DIY investors who want greater flexibility and control can run their own super fund and/or involve their partner, adult children or other members up to a maximum of six members.
All members must be trustees (or directors if there is a corporate trustee) and are responsible for all decisions made about investments and compliance with relevant laws.
SMSF’s can invest in a broad range of asset classes, including shares (listed and unlisted), direct residential and commercial property, cash and term deposits, fixed income products, physical commodities, collectables, and other forms of property.
There is no minimum investment, but set-up costs and annual running expenses can be high, especially if you use administrative and other services.
While all other types of funds are regulated by the Australian Prudential Regulation Authority (APRA), SMSFs are regulated by the Australian Taxation Office (ATO).
MySuper is a superannuation initiative by the Australian Government that created default superannuation products designed as basic funds without unnecessary features and fees. These products are available through a majority of superannuation funds (as above). They are low fee and are the default option that your employer will pay your super into unless you choose a different option.
Where to begin
As you can see, there are numerous types of superannuation options that exist in the market today, and it can certainly be daunting selecting what fund is right for you. The best place to start is by reviewing your existing super fund and identifying exactly what type of fund you have.
A professional financial adviser can help make this process simpler for you by reviewing your super fund to establish whether your existing or an alternative fund is best for you, which can make a huge difference to the value of your retirement savings in the long term.
*All statistics have been sourced directly from The Australian Prudential Regulation Authority (APRA) Quarterly Superannuation Performance publication.