BEGINNERS GUIDE TO SUPERANNUATION
Self-managed super fund
Other types of funds
Public sectors funds
Retirement savings account
Master fund/trusts and wrap accounts
Types of super funds
There are several forms of super fund available to Australian people. The following table shows the relative size of each sector within the super industry, and details how the 30 million member accounts within Australia are divided.
The table was developed by the Association of Superannuation Funds of Australia.
Industry funds arose from an agreement between the Australian Council of Trade Unions (ACTU) and the Hawke government in 1983. The idea was simple: the government would legislate for mandatory employee contributions for the previously un-superannuated union members, and the unions would establish super funds to receive these contributions. (And the unions would not go on strike.)
These early union funds were not for profit and adopted a “members-first” orientation which manifested in low costs and no commissions. Over time they grew, widened their membership criteria, and became more efficient, but never lost their members-first orientation.
The funds tended to developed for members of particular industries. There was a fund for health industry employees, a fund for building industry employees, a fund for public servants, etc. The funds came to be known as ‘industry funds.’
Industry super funds are generally suitable to clients who do not have enough super, or the inclination, for a SMSF. They are generally the most cost effective fund for this kind of member due to low fees. Most have several investment options, the range of which will therefore suit most clients.
Other than low fees (and higher potential net returns that go with them) the additional favourable features of industry super accounts include:
very cheap life universal life insurance (often known as ‘default cover’);
extra life insurance which can be arranged at low cost;
they usually have 5-15 investment options, which will match most client’s preferences; and
most funds are accumulation funds, at least for new members.
Retail funds are commercial funds which are run for profit, often by service providers such as insurance companies, banks, fund managers and investment companies. They are open to the public and provide administrative and investment services to their members for a fee.
Retail funds generally have higher fees than industry funds, which some argue are offset by potentially higher returns and greater flexibility. They generally have pre-mixed investment options, as well as more flexible investment options where the member can construct their portfolio. They also typically offer tax-effective life insurances.
Self-managed super funds
A SMSF is a small fund which has fewer than five members. Each of the members will usually be a trustee, either in their own name or as a director of the trustee company. It is a ‘do-it-yourself’ fund where the trustee formulates the investment strategy and has direct control over the investments.
SMSFs will generally be more cost effective for individuals who have large balances. This is because the administration and audit fees are mostly-fixed. That is, the costs of administering and auditing the fund do not vary according to the amount held within the fund. This is distinct from other funds, such as industry and retail funds, who typically charge a percentage of the balance for the administration fee.
Other types of funds
Public sector funds
Public sector funds are established by an Act of Parliament for government employees only. The liability for the benefits can be funded, unfunded or partially funded. The profits of the fund are put back into the fund for the benefit of all members. Long term members will generally have defined benefit funds, however most new members will have accumulation accounts.
Trish Power defines a defined benefit super fund as “a super fund that pays a final super benefit based on a formula that takes into account [the member’s] final salary and the number of years that [the member works] for [the] company or government department.”
Public sector funds have relatively low fees as the costs are subsidised by the government. The members are not always able to select investment options and the member must satisfy specific conditions to maximise the final benefit.
Corporate funds are employer sponsored funds that offer membership to company employers. They are generally arranged under a master trust or fund which is provided by a retail financial institution. Generally, each fund will have access to a wide range investment options and insurances.
The fees are often subsidised by the employer and some employers offer automatic insurances through group cover.
Retirement savings accounts
A retirement savings account (RSA) is owned and run by the member. They are primarily used by individuals with low balances. Banks, credit unions, building societies and insurances companies are allowed to provide these accounts.
RSAs are simple, low cost and low risk savings accounts which are invested wholly in cash. They are not designed for large balances (although there are no restrictions on how much can be contributed to an account) or for long term investing.
Master fund/trust and wrap accounts
Master funds/trusts are generally run by the large financial institutions and offer a range of super management services. Wrap accounts act as a custodial service to provide a range of investment options under one administration account.
The costs are comparatively high compared to other super funds, particularly if the member is not using all of the available features. These types of accounts are usually used by individuals who want control over their investments but do not want the responsibilities of a SMSF.