Australia’s best default funds

Employers are about to get a leg-up from the Labor Government on the often mountainous superannuation paperwork. MICHAEL LAURENCE helps with his 14-point guide on choosing the best default fund.

By Michael Laurence

Need to choose a super fund for your employees’ default option? SmartCompany provides a 14-point guide to help select the best.

Labor’s plan to set up an optional no-cost superannuation clearing house for SMEs is a smart idea. It will clear the paperwork and expense for these employers, ensuring that their employees’ super contributions are directed to the funds of their choice or to the employers’ default funds for those who don’t make a choice.

Even heavyweight employers with highly sophisticated payroll systems can find distributing super guarantee and salary-sacrifice contributions a most laborious task unless they use a clearing house. Imagine the potential paperwork plight for some small businesses – it’s mountainous. 

SmartCompany spoke confidentially to one of Australia’s biggest employers that makes super distributions to about 80 different funds, including many self-managed funds. For various reasons, this employer is yet to make a decision about whether to use a clearing house, including the one offered by its current default super fund.

But even when the Rudd Government’s planned clearing house arrives as promised in 2009-10, the task of course still exists for employers to nominate default funds for employees who are eligible to make a choice but don’t do so, and who don’t have an automatic default fund(s) for super guarantee (SG) contributions already under a federal award. 

Here is a 14-point guide to picking Australia’s best default funds:

1. Check whether your employees are eligible for fund choice: The tax office has a straightforward guide to an employer’s obligations. It is a useful starting point. 

2. Check for minimum life insurance cover: From July 2008, an employer’s default fund must offer members a minimum amount of life insurance cover, as shown in the table below.

Source: Australian Taxation Office

Although this insurance level is worth checking, Alex Dunnin, research director at super fund rating agency SelectingSuper, says almost every fund (apart from self-managed ones) offers this basic level of insurance.

3. Don’t leave your employees out in the cold: Rita Harris, a worldwide partner of Mercer specialising in consulting with employers and superannuation funds on employee superannuation benefits, suggests that employers choose default funds that provide employees with automatic and immediate life insurance cover without having to go through medical examinations.

An employee with possible health problems should not be overlooked when selecting a default fund. Sure, a fund might offer at least the basic cover required by law but it could still knock back a would-be member with a dicky heart.

4. Don’t be an easy target for the hard-sell: Some funds and their agents target employers with highly persuasive sales jargon. And smaller employers in particular who have limited staff and are busy just meeting orders or trying to drum up new business may be vulnerable to smooth-talking sales staff. Don’t be rushed into making a decision. This is a point to really watch, advises Dunnin.

5. Don’t do deals under the table: Super funds are legally prohibited from offering employers incentives to nominate their funds as default funds. While the tax office gives the example of funds being not allowed to offer benefits to employers such as free holidays, another underhand method is the more subtle carrot of offering a small business a much-needed loan for nominating a super fund.

6. Don’t make yourself a target for employee anger: Harris warns that even good employers who generally treat their employees very well are likely to upset them if a carelessly chosen default fund performs really badly. Dunnin wholeheartedly agrees.

Although past-performance is only one of the possible indicators to future performance, you have good reason not to select a fund that has been continually performing in the bottom-quartile over the longer term. Harris suggests employers look at past performance over the past one, three and five year periods.

SmartCompany’s recent feature on Australia’s best super funds (Wealth/Super, 13 November) is worth reading in conjunction with this article. It names some of the most-regarded super funds and suggests websites for further reading. 

The Australian Securities & Investments Commission (ASIC) has an excellent website designed to help individuals pick funds. It would also be invaluable to employers when selecting their default funds. 

7. Favour no-frills, big-name funds: There used to be a saying that company executives would never leave themselves open to the sack by not selecting an IBM computer system for their businesses. This is not a recommendation for IBM but the same big-name principle should apply when selecting a default fund. Treat with particular caution approaches from little-known super funds or their representatives – why expose your employees (and yourself) to the risk of the unknown.

Dunnin puts it well: “Employers should pick the Holden Commodore of super for their default funds [that is not a criticism of Holden; just the opposite].” Your default fund should be a well-known, simple and no-nonsense operation.

“If you, as employer, can’t quickly understand a fund; don’t put your employees into it,” Dunnin suggests.

8. Put yourself in your employees’ shoes: Ask yourself what sort of features you like in a super fund and think whether these features are suitable for your employees. Rita Harris suggests that employers undertake “some degree of due diligence” on potential default funds for their employees, looking for solid past performance; competitive levels of insurance cover and insurance costs; easy-to-use and comprehensive websites; facilities for members to check balances on-line; and the ability to conduct electronic transactions.

As I have mentioned, go back to my last Wealth/Super feature. It suggests a no-cost way to compare these factors.

Harris says call centres should quickly and knowledgably respond to members’ queries. Test out the call centres yourself. And cross the duds from your short list of default funds.

9. Don’t expose your employees to high fees: This leads on from point eight. Some super master trusts funds targeting small businesses have extremely high fees. While large employers generally use specialist consultants to negotiate hard with corporate master trusts, smaller employers do not have the time, money or clout. For smaller employers, the best deals for their employees are generally with the industry funds.

Consider both the administration fees and funds management fees. And don’t expose your employees to paying for comprehensive financial planning, wrapped up in a fund’s overall fees – particularly if they are unlikely to use that advice. And don’t sign up for a huge array of investment options – these come at a cost and your employees in default funds are unlikely to use them. In short, aim for your employees to pay wholesale fees.

10. Check whether a fund offers members limited financial planning advice: Harris says funds are increasingly offering their members limited financial-planning advice at no cost. She is not referring to most retail funds that include the cost of financial planning in their fees. Again, the most obvious funds here are the industry funds, but retail funds will increasingly respond to the growing message from consumers; cut your fees.

Limited financial-planning advice should cover such matters as whether members should make salary-sacrificed contributions; whether lower-earning members should make some after-tax contributions to be eligible for government co-contributions; and the level of insurance that should be carried. Some employees may become more interested in their super as the balance grows and in the future seek some guidance regarding investments that are most appropriate for their personal tolerance to risk.

11. Check what funds your other employees have joined: One way to help select a default fund is to discuss with your employees who have selected their own funds how they went about selecting a fund and why. Dunnin suggests that employers could even go to the extent of holding a staff meeting and asking them to vote on what fund should become the default fund.

12. Don’t offer financial advice yourself: Unless you have a licence to give financial advice, don’t. You are prohibited from advising employees about which super fund to choose or the level of contributions they should make. You can provide basic information to employees about the super system.

13. Check clearing house facilities by a potential default fund: Look at the conditions, fees and reputation of the clearing house. It would be smart to consider selecting a default fund that offers a clearing house with conditions that are not too onerous to meet, given your circumstances. (Some funds, for instance, offer their clearing house services free provided more than half of an employer’s employees are members of their fund.)

It would be unethical and illegal for an employer to encourage members to join a particular fund in order to meet any stipulation set by a clearing house. Be careful here.

14: My personal choice: The industry fund AustralianSuper would typify the type of big wholesale fund that a member should consider. It repeatedly wins awards from superannuation rating agencies for its overall package of fees, charges and services (including insurance). Some industry funds like MTAA and Westscheme have performed excellently in recent years, but I think their heavy concentration in alternative investments may make some employers think twice about them as bread-and-butter default funds.

As mentioned in my last Wealth/Super feature, the recently-launched BT Super for Life is a fund to really watch. And its features could make it a compelling inclusion on a short-list of potential default funds – low cost; few investment options; basic, no-questions-asked insurance; and easy online accessibility – with contributions easily transferred from a Westpac bank account (Westpac owns BT) into the fund. Keep a watch on its performance before making a decision.

This BT/Westpac fund will no doubt be the standard-setter for other simple, low-cost funds run by bank-owned funds management groups. And these may well become excellent choices for default funds.

See our Growth Resources section, Wealth/Super, for more articles.