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?
Key takeaways
- 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.
- 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.
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.
What is an index super fund?
Simply put, an index super fund is just another type of superannuation fund that aims to replicate the performance of a specific market index.
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.
More guides on Finder
-
Vanguard Super: Performance, features and fees
With Vanguard Super you are automatically invested in the Lifecycle option, which adjusts your investments as you age. You can also mix and match your investments from several other options.
-
Super on paid parental leave
Going on parental leave will impact your super. Here are the rules for super on parental leave and how to look after your super balance while you're off work.
-
Benefits of superannuation
Superannuation has many benefits. It’ll help fund your retirement, but it also offers tax discounts, investment benefits and discounted insurance cover, too.
-
Superannuation statistics 2024
There are 24.4 million super accounts in Australia with assets totalling $3.9 trillion. Find out the latest superannuation statistics.
-
Australian Retirement Trust vs HESTA
We've compared the fees, investment options and performance for both Australian Retirement Trust and HESTA to help you choose between these two popular super funds.
-
Best super funds Australia – 5 expert picks
We've analysed Australian super funds to find the best-performing super funds, the best industry super funds and the best super fund for low fees. Find the right super fund for you.
-
Australian Retirement Trust | Performance, features and fees
Sunsuper is an industry super fund that meets your needs as you move through the workforce and transition into retirement.
-
Super co-contribution: What is the government co-contribution?
Find out if you're eligible for the government's co-contribution scheme, potentially receiving up to $500 for making personal after-tax contributions.
-
Retail super funds
Here's how retail super funds work and how they compare to industry super funds. Compare retail super funds here and find the best one for your needs.
-
Early release of super
Explore the intricacies of the early release of super, including eligibility criteria and application steps. This guide provides essential insights for accessing your superannuation funds prior to retirement.