Wednesday, 31 July 2013

The best deals in Superannuation in Australia Part 3

The KISS Principle: Keep It Simple, Super(annuation)Freak
Amongst my dozens (and dozens) of readers, not everyone wants to worry about the details of asset allocation or have to keep an eye on multiple funds.  I completely understand if you want to find a fund that you can leave for a decade and only revisit as your life situation and closeness to retirement changes substantially.  Your particular choice of fund may also depend on other factors such as the availability (and relative price) of insurance connected with the fund.
In this post I'll compare the diversified index fund offerings amongst the funds we've already looked at.  These funds target a particular asset allocation between Australian Shares, Fixed Interest (Bonds), etc, and allocate across different index products for you to achieve that target.  I'll split the funds between the most conservative funds (30% or less in the growth assets of Australian Shares, International Shares, and Property & Infrastructure), the less conservative that have an asset allocation closer to the typical Australian balanced superannuation fund (62-75% in growth assets) and those in between (50% in growth assets).  Typically the more growth oriented, less conservative funds are expected to experience higher long-term growth but also higher year-on-year volatility, so these may be less suitable if you only have a few years until retirement.
The different classes of funds are in the tables below.  I've ordered them by the best estimates available on Management Expense Ratio (MER), a % management fee charged on the assets you have in the fund.  Ideally we want to keep administration and management fees to a minimum while still being able to achieve our retirement objectives.
'Conservative' Funds:

ANZ: ANZ Smart Choice Super: Conservative
Colonial: FirstChoice Wholesale Multi-Index Conservative

'Moderate' Funds:
ING: ING Direct Living Super 'Smart' Option
ANZ: ANZ Smart Choice Super: Moderate
Colonial: FirstChoice Wholesale Multi-Index Diversified
'Balanced' or more 'Growth' oriented Funds:

1Includes credit reduction 0.09% for Operating Risk Reserve for FYs 2013-2016
2Includes admin fee 0.05%
*Unspecified distribution between Australian and Global Fixed Interest
Aust: AustralianSuper Indexed Diversified
HostPlus: HostPlus Indexed Balanced
SunSuper: SunSuper Balanced - Index
ANZ: ANZ Smart Choice Super: Growth
Colonial: FirstChoice Wholesale Multi-Index Balanced

Another option available are the ANZ Smart Choice Super 'Lifecycle' investment options.  These are arranged by decade of birth.  These gradually decrease the allocation to relatively volatile growth assets as time passes (so the allocations will change, e.g. the 1980s likely becoming more like the current 1970s allocation over the next decade).  My concern with these is that they will adjust in a completely set fashion, not taking into account our individual circumstances.  For example, if you find that your retirement savings reach your goal level much earlier than retirement (you have 'enough') then you may wish to reduce your level of growth assets earlier to emphasise preservation of assets.  You may equally be willing to take greater risks while older (and/or work longer) if you have not yet achieved your desired retirement savings level.  I include them for your information nonetheless:

Whether you want to take more detailed control of your super, or just want a fund you can let do the work for you, I hope this series has shown that there are index funds available in Superannuation in Australia that can help you achieve your retirement goals at a low cost.

Added: Links to Superannuation funds (and their fees):


  1. Hi Super(annuation) Freak,

    I just stumbled across this Blog (thanks Dr Google) and can I say it is fantastic!

    I recently went through exactly the same process of choosing a low-cost index superannuation fund. It's such a pity that I made my decisions before you started writing your blog, as it would have been great to follow along with you as I made my choices!

    FYI, I ended up choosing the HOSTPLUS Index Balanced option (100% of my super now invested in it). I am currently 25, so the asset allocation was pretty much spot on for me. The cost is also very, VERY cheap (I am also looking at index-investing outside of super, with Vanguard MERs running at 0.9% compared to HOSTPLUS' 0.05%!)

    I'm really looking forward to following your blog now, as I am still doing a lot of reading around investing. I'm sure you've got plenty of potential topics in mind, but I would love to read your take on choosing super based on your age. My current thinking is that I will build up my super in the various industry funds with index options (HOSTPLUS, SunSuper, AustSuper etc), rolling over my balance based on asset allocation. I am also currently trying to decide though if I want to transition to a SMSF , particularly to invest in some more diverse assets, such as positive-cashflow investment properties.

    Anyway, thanks again for the blog so far, looking forward to your next post!

  2. Thanks Ben for your kind words.

    HostPlus Index Balanced is a great choice (in fact, in my opinion from the options I've found to date, it's probably the fund with the best value for money).

    I'll pull together some more information on asset allocation for a post. It will mostly be links to people and information that I've found helpful in figuring it out. Unfortunately I have found the answer is usually 'it depends' but I can at least highlight what it often depends on (and age is certainly part of it when the investments won't be touched until age 60).

    I'm not sure when (if ever) I'll do an SMSF myself. My main concern is cost - at present the cheapest option to do the admin, reporting and audit is around $700 p.a. If I had a balance of $140,000 (and mine is not yet that high) then that would be 0.5% p.a. before including investment fees. My setup using Industry Funds and ING is less than 0.5% including admin and investment fees, so I'd have to be able to get better expected returns than that extra cost to justify it. It will likely be many years before I think seriously about a true self-managed fund (but possibly fewer before I think about some of the options like those mentioned in Part 2).

    1. Hi S(a)F,

      I agree regarding the expense of the SMSF. With the low PA fee and MER of the current index industry funds, it seems pretty hard to justify the (minimum) $700PA fee. Taking into account the other investment costs inherent in an SMSF, such as MERs of index funds or brokerage on ETFs, the scales tip further in favour of institutional funds. As you mentioned in one of your posts, index-based offerings are likely to increase under the new super regs that came into effect this year. This should increase choice and competition in this space as well.

      As I mentioned above, I think the main reason I would consider an SMSF is to invest directly in property, which I don't think can be done easily without an SMSF structure. I would also be able to split the cost of the SMSF with my wife, so this would make an SMSF more competitive on a cost basis.

      Another key question I am currently researching is how and when to transfer regular investments (eg share holdings or investment property) into the tax-effective haven of super. The link on your main page suggests your interest in Financial Independence / Early Retirement. I too am interested in this concept, but Australia's superannuation system seems to throw up some unique challenges to achieving this in the long term. For example, if you are aiming to achieve retirement / independence before your preservation age (which is really the definition of early retirement), how much of your investment should be put into super, and how much into investments outside of super? Then, when you are approaching your preservation age, what is the best way to get your FI assets (outside of super) into super account, so that you can pay less tax?

      Obviously don't expect you to answer all these questions for me (or to offer me specific financial advice!), but thought I would share them with you for the sake of discussion.

    2. Hi Ben,

      Thanks for your thoughts. Australia indeed doesn't offer some of the 'backdoor' retirement fund withdrawals that are available elsewhere.

      I found this post on direct property in superannuation enlightening:

      We're currently better on making late/extra transfers into super though. You'll need to check the exact rules but when last I checked we're usually allowed to contribute $150k p.a. in after tax funds before retirement age which allow this sort of transfer (and there are allowances for contributing three years at once, just be careful not to make further contributions in the following years). Of course all the details will likely change over the next 35 years!

      In terms of how much to save for the time between retirement and preservation age, the calculation is much like a standard retirement calculation except if you have enough super to keep you going in retirement then you need enough assets outside super to last for the in-between years. Of course if you're aiming to retire at 30 this probably means saving just as much (or more) outside super funds as in them!

  3. Hi David - how did you get 0.11% for HostPLUS Indexed Balanced fees when on their site it shows 0.05%? THANK YOU for doing this, this is immensely helpful, some links to the sites would be good. I am sure you will tweak this in future! Tx, Amy

  4. Hi Amy,

    Thanks for the feedback. I've added links to the bottom of the post.

    With HostPlus they're funding an operating risk reserve for the next three years (see section 6.5.2: ) so " is estimated that the 30 June crediting rates will be reduced by approximately 9 basis points on an annual basis over the three year period...". I've crudely added in 0.09% as a simple estimate.

    Even with that their Index Balanced fund provides (in my humble opinion) as good or better value than any other similar product (and in 3 years, if they maintain their low-fee philosophy, they look to be by far the lowest fee balanced fund for all but the smallest superannuation balances).

    1. I think this is why I failed accounting - I do not understand what this means at all. Sounded like its just a normal requirement?

    2. OK, I re-read it, basically they have to buff up their Reserves over the next 3yrs, and they are going to do this by increasing their % Fees for the Fund

    3. Yep, you got it. They're lowering their returns for three years by a small amount while they increase their reserves. This is to meet a regulatory requirement (which I think only came in this July, as a few funds are doing this at the moment) and it's probably a good thing (for the overall superannuation system, if not by a small amount for our returns for a few years).

    4. Happy to advise that the 0.09% ORFR funding will now be taken from an administration reserve, effective 01/07/2013.

  5. Hi S(a)F,

    Thank you for the blog (and your posts at MMM). I'm a late 30s ex-pat living in the US since 1999. I've recently realized that I have an orphaned Super from my old job in Oz, and so have been trying to get up to speed.

    My former employer dumped my account into an AMP "Eligible Rollover Fund", where it's been sitting idle for over a decade, earning ~ 2%. I'll never contribute again, and just need figure out a productive place to let it sit and grow while I wait to turn 60.

    HostPlus seems a likely candidate to me, but I wondered if it strikes you as a reasonable direction for my scenario?

    1. Hi B,

      Obviously a lot depends on your particular circumstances. HostPlus has some very good low cost investment options available. One thing to think about is if you are likely to retire in Australia or the US. If you're unlikely to face expenses in Australian dollars in retirement, you may prefer a fund with more International shares (probably unhedged to the AUD).

      Another thing to keep in mind is your current balance. If you've got, at least, say, roughly $20-30k in there then an industry fund like HostPlus, Australian Super or Sun Super is potentially very cost-effective. If you've only got under ten thousand in there then the fixed fees (~$65 p.a.) can eat away substantially at your return and providers like ING or Colonial (wholesale) may work out cheaper.

  6. Appreciate the response!

    I fall into the to category that would benefit from the Industry Fund scenario. Also I currently anticipate retiring in the US, so you make a good point about the currency hedging. My 401K and taxable investments over here are predictably US-tilted ... I guess I would just look to continue in that manner.

    I'll check out Australian Super, and Sun Super in addition to HostPlus.