What types of funds are there?
The table below shows how the superannuation sector is divided up.
Superannuation fund types
| Total assets ($billion) | |
|---|---|
| Small funds (APRA and Self Managed funds) | 597 |
| Retail | 541 |
| Industry | 446 |
| Public sector | 354 |
| Corporate funds | 54 |
1. Small funds
(a) Self Managed Superannuation Funds (SMSFs)
An SMSF must have between 1 and 4 members.
An SMSF is predominately for people who want to control their own superannuation. The trustees, who are also members, choose their investments, investment strategy and specialist advisers. They also take on the responsibility of the fund’s administration such as maintaining records, financial statements, tax returns and audit.
The sole purpose of an SMSF is to provide retirement benefits for its members. This sounds simple enough but many trustees have floundered on this principle by using their fund as their personal bank account or ignoring their own investment strategy.
Unless members have the expertise to set an investment strategy, choose the investments and do all the administration they will have to buy that expertise or put their retirement funds at risk. Specialists cost money and it is generally accepted that unless an SMSF has at least $250,000 it would not be a cost-effective option.
SMSFs have been an extraordinary success story. In 2004 there were 271,515 SMSFs and as at June 2015 there were 556,998 with over a million members, 70% comprised of just two members. Performance has also been impressive. According to the ATO (Australian Tax Office) their average return over 8 years to June 2014 was higher than large super funds. They are also have the largest share of superannuation fund assets;
- SMSFs 32%.
- Retail funds 29.1%
- Indiustry funds 24%
- Public sector funds 12%.
- Corporate sector funds 2.9%.
(b) Small APRA funds
A small APRA fund (SAF) is much like an SMSF but the compliance obligations are passed onto an approved trustee company.
They can be useful for:
- Anyone who wants greater control of their super investments but without the trustee responsibility.
- Families who provide for a relative with an intellectual disability.
- Those moving or living overseas who can no longer be a member of an SMSF.
2. Retail funds
Retail funds are offered by the big institutions like the banks and AMP. They usually offer;
- Investment options. Most offer a wide range of investment options.
- Insurance. Most offer insurance benefits like TPD, Term life and salary continuance.
- Ancillary benefits. Many have ancillary benefits like cheaper home loans, online access etc.
- Financial advisers. Most are recommended by financial advisers who charge for their advice.
- Accumulation funds. They are all accumulation funds. Your contributions accumulate with interest.
- Fees. Retail funds used to be associated with higher fees but this has changed. Some have low cost offerings like MySuper.
- Profit. They are all companies with shareholders and a profit motive that drives their decisions.
3. Industry funds
Industry funds were initially for employees of a certain industry. Today the larger industry funds are open to everyone. They usually offer much the same benefits as retail funds;
- Investment options. Most offer a wide range of investment options.
- Insurance. Most offer insurance benefits like TPD, Term life and salary contiuance.
- Accumulation funds. They are all accumulation funds. Your contributions accumulate with interest.
- Fees. Industry funds are associated with lower fees because they don’t carry the cost of a financial adviser. They also don’t have shareholders and can concentrate on benefits to members.
4. Corporate funds
A corporate fund is a super fund open only to employees of the employer sponsoring the fund. The fund may be controlled by a board of trustees comprising the employer and empoyees or it could appoint an independent trustee.
Typical features are;
- All profits are given to members. There are no shareholders sharing them.
- A large range of investment options.
- Most are accumulation funds but some may still offer a defined benefit. A defined benefit is usually ‘defined’ as a percentage of final income (often around 2%) multiplied by years service. So 50 years service means the member will retire on 100% of his or her final salary. This type of fund used to be common but has become a rarity as employers divested themselves of the risk of having to pay these pensions in an aging population.
5. Other funds
5a. MySuper
MySuper is the new default account for employees who dont choose a superannuation fund. This will become their default choice. MySuper is characterised by;
- Lower fees.
- Fewer options.
- Investment options related to ‘stage of life’. Usually this means the investment option becomes less risky as the member approaches retirement.
- The ability to opt out of insurance.
5b. Elligible rollover funds
These funds are a holding account for lost or inactive members who have relatively low balances. There is a disaprity of costs and returns and so members with low balances could find them decimated by fees and poor returns.
