I am a relatively young student with a fairly low superannuation balance. I am not expecting any substantial new contributions to be made to my super any time soon due to my income being largely derived from non-standard employment. That said, I would like my existing balance to compound as effectively as possible.

One of the things I have found frustrating is that on relatively low superannuation balances, super fund fees end up being a large percentage of the capital invested. To give an example, assume fees of $100/yr on a $1000 balance. This is a 10% fee. Assuming historical market returns of ~10%, all gains are eaten up in fees. This typically happens during a person's youngest years where the money would otherwise have the longest amount of time to compound were it invested somewhere with lower fees.

Outside of superannuation, one can buy Vanguard index funds with fees as low as 0.15%/yr on the Australia Securities Exchange. On a $1000 balance this is $1.50/yr in fees instead of $100/yr. Ideally if I had total control over my money I would withdraw it all from superannuation and invest it in such index funds at $1.50/yr myself. Of course superannuation is not like regular money -- I cannot simply withdraw it, certainly not at my age. So, I am looking for a superfund that get's as close as possible to simply putting my money in index funds. Or more to the point, one that has low fees which are commensurate with how little added value there is to them doing this instead of me doing it myself.

Basically I'm after the best low-cost no frills provider whose returns will essentially match the market based on the fact that all they do is put the money in index funds. I'm not looking for actively managed funds with exotic investment strategies and I don't need colorful brochures in the mail every quarter.

Given that I can't simply withdraw my super and manage it myself, what are some good providers that meet my preferences?

  • Googling for super comparison sites can be helpful. Also, some super providers (eg Sunsuper) allow you to choose what your super is invested in. Almost always, the preselected option (eg "Balanced") charges far more in fees than the "index" options. Eg, Sunsuper's Balanced at the time of writing is 0.688%, whereas "australian shares index" is 0.08% and "international shares index" is 0.09%. It's a good idea to always dig in and view the fees charged (and hard to do, because the providers "bury" them). No one knows what the future returns will be, but fees are guaranteed. – Silas Palmer Nov 11 '16 at 3:52

Yes you can't simply withdraw your super until you are aged 60 (and that may go up slightly on Budget night 13/05/14). But you can roll it over into a SMSF where you decide where you invest your super funds. However, I would advise against you starting a SMSF at this early age with a very small super fund account. The Admin. and audit fees would eat your super account up in one year. It is recommended that you have at least $300,000 to $400,000 in super fund assets before starting a SMSF to make the fees competitive and efficient. Now if you are with a partner and start a SMSF together, then it is your combined funds that need to be over the $300K mark (a SMSF can have between 1 to 4 members).

The cheapest fund I could find was First State Super. The fees are $52 + 0.64% per year (for the High Growth option). So for a balance of $1000 you would pay $58.40 or 5.84% per year.

The High Growth Investment Option has returned 18.4% over the last year, 12.7% pa over the last 5 years, and 8.2% pa over the last 10 years (which includes the period covering the GFC).

So even with a small balance of $1000 your super investment will still continue to grow. If you could slowly grow your super account to $2000 your fees would be $64.80 or 3.24%, and at $3000 balance your fees would be $71.20 or 2.37%.

The great thing about super is the tax advantages. You may be complaining now about fees on a small balance, and yes you should try to minimise these fees, not only when you have a small balance but also when your balance is larger, but the tax advantages available through superannuation will really come into play when you are on a high income paying the tax at or near the highest marginal tax rate. Compare the top marginal tax rate (plus Medicare Levy) at 46.5% compared to the tax rate of 15% on super contributions and investment returns. And it gets better, when you retire and take a pension or lump sum from your super after age 60 you pay zero tax on the income stream or lump sum. and you also pay zero tax on any ongoing investment returns in your super.

The benefits of superannuation are numerous, and the best way to reduce your fees for now is to find a fund with lowest fees, try to increase your balance so your percentage fees go down, and try to consolidate all your super funds into the one with the lowest fees, if you have more than one super fund.

  • I had considered SMSF in the past, but as you said, the barrier's to entry are actually quite high. I agree re. the tax benefits. At my age though there's many decades until I'll be eligible to withdraw the money leaving a lot of time for various legislation to mess things up. So voluntary contributions aren't as attractive as they would be were I older. – Bryce Thomas May 3 '14 at 12:14
  • @BryceThomas - That is what many older people in their 50s and 60s were saying 30 to 40 years ago, and now they are struggling to save up enough super to have a decent retirement. Most of them were in the situation where they didn't have super when they were young, but the ones that did where thinking the same as you are now. They don't see any benefit in it when they are young and think they can catch up when they are older. But super is a long term investment, and if you can boost it by a couple of thousand when you are in your early 20s, at least enough so the returns will beat the fees,... – Victor May 4 '14 at 21:13
  • ...you will find compounding working for you at an early age. Yes the government can play with and change the rules, but instead of giving up with rule changes, you should play the game within the rules and find ways you can still benefit from in the long term. That is where a Financial Planner can be very helpful. – Victor May 4 '14 at 21:19
  • perhaps, but we're talking about an unknown on a long time scale. Also, someone who compounds their money outside of super can access it at an earlier age (retire earlier) should they have saved enough to see them through. If one were to contribute said savings to super, there's the risk of being obligated to work until super eligibility for lack of immediately available money, only to receive an unnecessarily large super payout relative to one's expenses throughout the remainder of retirement. – Bryce Thomas May 5 '14 at 11:11
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    @BryceThomas - everything in the future is an unknown. However, if you don't plan for the future you will find it creep up on you and you'll end up having regrets. Yes I think you should invest outside of super as well. But the reason that you can't touch your super funds until preservation age (60 in your case), and that the tax concession are so good, makes it the perfect long-term investing vehicle. – Victor May 6 '14 at 4:52

Virgin and AMP Flexible Super both offer funds that track Australian indexes.

  • I think this is a valid answer, but the question is an off-topic request for product/service recommendations and should be closed, or edited so it's not asking for specific recommendations as it's otherwise a reasonable question. – GS - Apologise to Monica May 25 '15 at 8:27
  • Financially speaking it makes very little sense to invest in Australian indices while being employed in Australia. – vasily May 29 '15 at 11:43

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