A lot of Australians are eager to ensure their superannuation is invested wisely to maximise their balance by the time they retire. However, comparing the different super-product choices can be tricky.
Recently, there’s been increasing criticism of industry super funds, particularly regarding their oversight and transparency around unlisted investments and the role/influence of unions.
Many people believe that establishing an SMSF is the only way to gain greater control and transparency over their super. However, there are now more straightforward and cost-effective options available.
What are your options?
Each year, I write a blog comparing the top eight industry super funds and provide my recommendation on which one/s stands out as the best overall. In the past, I typically didn’t include retail super funds because they historically lacked competitiveness in terms of investment returns and fees – industry funds were usually the better option. However, that landscape has shifted in recent years.
Twenty years ago, retail funds like AMP, Colonial First State, and MLC dominated the superannuation market. Unfortunately, they were costly and delivered mediocre investment returns, partly due to the commissions they paid to financial advisors. This situation led to the significant growth of industry super funds over the past few decades.
In 2019, the Australian government made an important decision by banning financial advisors from receiving commissions on investments – a move I consider one of the best regulatory actions taken (most other government decisions in this space have been terrible!). This change has forced retail funds to improve their offerings and become more competitive – some are now viable alternatives to industry funds.
Industry super funds
My biggest criticism of industry super funds is their failure to achieve economies of scale for Australian superannuation investors, even though they operate as not-for-profit institutions.
Back in 2013, the average fee charged by industry super funds was 1.07% per annum. Today, that average has decreased to 1.00% per annum. While this may sound like a positive development, I argue that they haven’t scaled effectively enough.
In 2013, approximately $356 billion was invested in industry super funds. That figure has now more than tripled to $1.2 trillion, reflecting an average increase of 11.4% p.a. However, Australia’s population has only increased by about 1.4% p.a. during this time. Therefore, while industry funds may have more members to manage, which does contribute to costs, the growth isn’t substantial.
Looking at the average fees, industry super funds charged their members over $3.8 billion in fees back in 2013. Today, that figure has ballooned to over $12 billion. Yes, it costs more to manage $356 billion compared to $1.2 trillion, but it shouldn’t cost three times more!
It’s encouraging that industry super funds are designed to prioritise serving members over making commercial profits. However, there’s an urgent need for a stronger focus on productivity within these funds. Given that the unions appoint at least one-third of the directors for these industry funds and considering that unions aren’t typically known for their focus on productivity, I’m not optimistic about significant changes occurring anytime soon.
The commercial reality for industry super funds is that the average member balance remains relatively low, at just below $100,000. Due to this, industry funds often charge fees as a percentage of the account balance, which can be costly for members with larger balances. If your super balance exceeds $500,000, it’s important to secure fee structures that are capped or fixed, and minimise any percentage-based fees, to achieve cost efficiencies through economies of scale.
Retail super funds
Since 2015, the market share of retail super funds has dropped by over 30%. As mentioned above, they’ve fallen out of favour largely because they have been less competitive compared to industry super funds. Some of the largest retail super funds today include Insignia (formerly IOOF), AMP, Colonial First State and Mercer.
In a significant shift, the largest index manager in the world, Vanguard made a strategic decision a few years ago to stop working for industry super funds so that it could launch its own super fund product to compete with them.
This product was launched at the end of 2022 and recently surpassed $1 billion in assets under management. While this amount is relatively modest in the broader context, it marks an important milestone. Like industry super funds, Vanguard operates as a not-for-profit mutual entity and has a solid track record of achieving scale and materially reducing investment fees, unlike industry funds.
Vanguard Super’s product offering is competitively priced – cheaper than industry super funds. The table below compares Vanguard Super’s annual fees with those of UniSuper, which I identified as the best overall fund in July 2024.
Our reservations about Vanguard Super at this stage are twofold:
- The product is relatively new. Although it invests in Vanguard funds that have been established for decades, new products often encounter teething problems. We prefer a product that has a solid track record before recommending it.
- All funds are invested using traditional market cap indexing. We believe this approach does not adequately address the current market risks, as discussed here and here.
I plan to include Vanguard Super in my super fund review which I’ll publish in July 2025 as it will have 2.5 years of history by then. Until then, we will monitor it closely, but I would not be surprised if Vanguard Super ends up being a better option than industry super funds.
SMSF
Prior to July 2016, accountants could recommend a client establish an SMSF. However, accountants now need to be licensed to make this recommendation. Consequently, the proportion of SMSFs has been in decline.
Operating an SMSF takes time to deal with all the compliance matters and costs approximately $3,000 to $7,000 p.a.
In my view, the only reason to establish an SMSF would be to invest in unlisted assets such as residential or commercial property or unlisted property funds. Other than that, a wrap platform not only provides you with the same flexibility but will be more cost-effective.
Wrap product
Wrap products can be used for investment portfolios held outside superannuation, including personal, company, or trust accounts, as well as super accounts.
Think of investing your super with a wrap as akin to visiting a buffet restaurant. You have a wide selection of food items to choose from all in one place – you can select what you like and skip what you don’t want. The restaurant takes care of everything from cooking to serving and cleaning up. When you’re done, you simply pay a single bill, regardless of how much you’ve eaten.
A wrap platform operates in a similar way. It sets up a super account in your name, and the provider manages all compliance, tax, returns reporting, and administration. Wrap providers usually offer an extensive investment menu that includes shares, most ETFs, and typically between 300 to 600 managed funds – allowing you to decide what to invest in. This setup provides full transparency and control over your investments and fees, without any of the administrative headaches of a SMSF.
Part 2 next week…
Next week, in part two of this blog, I’ll take a closer look at wrap products, covering their costs, when to use them, and their pros and cons. I’ll conclude by discussing key considerations to help you determine which option is best for you: (1) an industry fund or a retail fund, (2) a wrap product, or (3) an SMSF.
