How to know when it's time to change super funds

What if I told you that by spending a few hours looking at your super account, you could end up saving tens of thousands of dollars?

Nope, it's not a scam — it's true.

In fact, if you're young and have a long career ahead of you, switching to a better investment option or fund could save you $100,000 or more.

I spoke to three independent financial advisers to find out:

• The most important thing to think about when it comes to superannuation
• How to tell if your super is underperforming
• What you need to know about fees
• What to think about before switching funds

The most important thing is choosing the right investment option

While each super fund is different, they all have a mix of growth assets — like shares and property — and defensive assets like bonds and cash, which are less volatile.

While shares and other growth assets can be subject to wild price swings, they tend to be much better investments over the long term.

As you get older, you'll have a bigger super balance and less time to ride out ups and downs in riskier investments like shares and property.

It's a time when it's usually better to play things safe by choosing an option with a higher allocation of defensive assets.

The problem for young people is that many default super options are "balanced". While each fund will be slightly different, balanced funds tend to have about 70 per cent in growth assets and 30 per cent in defensive assets.

In contrast, high-growth or "aggressive" investment options will have much higher allocation to shares and property — often more than 80 per cent.

If you are in your 30s, and have decades until you retire, these high-growth or "aggressive" options are likely to be a better option, says independent financial adviser Kyle Frost.

"[Choosing the most appropriate option] is likely to be one of the most important decisions, probably more so than the fund you choose," he says.

"You'd rather be in the right investment option in a bad fund than the wrong investment option in a good fund. Luckily there's nothing stopping you from having the best of both worlds."

To show how much difference switching can make, let's assume someone is 28, earning $60,000 a year and has a $50,000 starting balance.

We'll also assume their salary increases with inflation until they're 65, and that they have standard 9.5 per cent super contributions from their employer.

Over the last 10 years, the median balanced fund has earned 7.3 per cent per year, while the median growth fund has earned 8.3 per cent.

Using those numbers, a person who stays in the balanced fund would have a super balance worth about $720,000 in today's terms at age 65.

If that person instead invested in a growth fund until age 50, and then switched to a balanced fund until 65, they would have about $825,000 — a difference of $105,000.

How to tell if your super fund is underperforming

When it comes to performance, it's important to compare apples to apples, says independent financial adviser Suzanne Haddan.

If one fund has 80 per cent in growth assets, you'd expect the returns to be higher than one in 70 per cent growth assets because the risk is higher.

What makes things complicated is that the assets in "balanced" or "growth" funds can vary widely, Ms Haddan says.

"The first tip I'd give you is to ignore the label your fund puts on your investment option. So many of the balanced options, in my mind, are really growth options," Ms Haddan says.

Ms Haddan's second tip is to make sure you're looking at long-term performance, not just what a fund or investment option has done over the last year or few years.

"You have to compare the risk you're taking over the right time frame. If you want a rule of thumb for younger people in balanced or growth, it'd be a minimum of five years," she says.

"I'd prefer a bit longer, but five years would be the minimum."

Most super funds list the performance of each option on their website.

If you find that your option is underperforming compared to funds with similar balance of growth assets over a long period — like seven or 10 years — it might be a time to start looking around for a better option.

Before you do any switching, make sure to read this section first.

Low fees are better, but you get what you pay for

With any investing, one of the best things you can do is to keep your fees to an absolute minimum.

But when it comes to super, focusing solely on fees can lead you astray, Mr Frost says.

The higher growth investment options, which tend to have the higher returns, often have higher fees because the shares and property are more complex to administer compared to safer assets like cash, Ms Haddan says.

Also, some funds might have higher fees because they provide services that you might find valuable: like a good website, an app or responsive customer service.

"We always say it's best to have low fees, but you have to compare what you're getting. Your super fund might have lower fees for the conservative option, but you might notice the fees will grow as you go up the risk scale," she says.

"It's about getting bang for your buck."

If you're looking for a growth option, a good rule of thumb is to aim for fees of around 1 per cent or less per year, Mr Frost says.

"Even if you look at the competitive industry fund options that have performed well over time, they're still going 0.8 or 0.9 per cent in terms of their fees," he says.

"The biggest reason for that is because they hold unlisted assets like property and infrastructure, so it's really hard to compare on an apples-to-apples basis."

What you need to think about before switching funds

You can lose insurance cover

Many of us hold insurance for TPD (total and permanent disability) and death in our super funds. When you switch out to a new fund, you can lose that insurance.

In some cases, you might find it hard to get the same amount of cover in your new fund, says independent financial adviser Amir Salehi.

When one of Amir's clients found a lump in her breast, insurance companies started excluding cover for breast cancer. Luckily, she had several old super accounts with insurance policies that did include cover.

"What she ended up doing was keeping a small amount in each super account [with the insurance] and consolidating the remaining balance into the fund that was the best for growing wealth," he says.

If you're in this situation, Mr Salehi says to make sure you're transferring enough money to your old super account to cover the insurance premiums each year.

If you don't, you might lose the cover, and you might not be able to get it back.

You can lose perks

If you're lucky enough to have some or all your super in a defined benefit option, you should think very carefully before switching out.

These funds are increasingly rare, and Mr Salehi says they're most often seen in people who have spent time in the military.

The reason these schemes are so valuable is because they provide certainty, Mr Salehi says.

If you have a defined benefit, you are guaranteed a certain income at retirement, regardless of happens to the economy.

Some employers will provide perks for using the default fund, such as additional contributions or free insurance. It's another thing to think about when weighing up the decision to switch, Ms Haddan says.

"I was looking at one of my clients who moved employers. As long as we used the default fund for the new job, the employer would pay the [TPD and death] insurance," Ms Haddan says.

"It's all interwoven and you have to look."

This article contains general information only. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.