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Index super funds in Australia: A better way to save for retirement?

Index funds are designed for long-term investing, so why do most super funds in Australia work differently?

Economists tend to disagree on a lot. When it comes to passive index funds though, there is growing consensus – if you're looking for a long-term and hassle free investment strategy, they tend to be a better option compared to active funds.

Studies on the US market and more recently on the ASX have shown that the majority of actively managed funds do not outperform the market.

The SPIVA report, an analysis done by Standard and Poors that scores active funds, shows that over the last 15 years, 80.89% of general equity active funds underperformed the ASX 200 index.

Finder's own research of 100 passive funds and 24 active funds listed on the ASX, found that on average the passive funds outperformed the active funds. Over 5 years, the index funds returned 6.79% p.a. on average net of fees, compared to 5.09% p.a for the active funds.

For hassle free investing, index funds combine ultra low fees to save investors money in the long-term and provide returns that match the market.

Indexing investing in super

For many years, Australians haven't been able to take advantage of indexed investing in their super accounts. Superannuation remained a compulsory form of investing that was largely actively managed by fund managers.

But times have changed. Many retail and industry super funds now provide an indexed investment option. These "Choice Products" are pre-mixed investment options that aim to simply track a single index or combination of indices. Like index funds, the index investment strategy allows for much lower fees compared to the super industry average.

Index super funds vs a standard super fund

To see how much consumers could be saving we put together the fees from the 10 largest super funds that have index investment options. We then calculated the annual fees a person would pay on a balance of $100,000.

Cheaper annual fees means larger savings

Two funds stand out – Hostplus's "Indexed Balanced" option and Rest's "Balanced - Indexed" option, costing less than $200 per annum.

The Hostplus option is 67% cheaper, while the Rest super option is 56% cheaper, than the average indexed super fund at $410 per annum. This amounts to savings of $275 and $232 per year respectively.

The savings are even greater when compared to the average fees for all super funds. The Hostplus option comes out 77% cheaper and the Rest option 67% cheaper than the average super fund. This amounts to savings of more than $400 per year.

These savings can become very important over the long run. They're not just added to your super balance once, they're reinvested, helping grow your super more over time. For example $400 reinvested annually for 30 years with an average growth rate of 5%, would grow to $28,304.

How fees impact your balance

Working out how much fees can affect your super balance can be a difficult task. Finder's model of super fund balances for indexed super funds shows that after 40 years, assuming 1% growth in salary, and 6% annual return, the Hostplus Indexed Balanced option will have grown to $884,857, while the average super fund will have grown to $783,325. That's a difference of $101,532.

When it comes to performance, APRA data shows indexed super fund options have an average nine year net investment return of 6.93%, compared to 6.51% for the average choice fund, and 6.41% for the average MySuper fund.

Finder's Insights Column examines issues affecting the Australian consumer.

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