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.
Simply put, an index super fund is just another type of superannuation fund that aims to replicate the performance of a specific market index.
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.
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.
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.
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.
Use our free superannuation calculator to see your projected retirement balance, and how this could change by switching funds.
Spouse super contributions allow you to grow your partner’s super balance and also save money on tax. Here’s how spouse super contributions work.
Making extra super contributions on top of what your employer contributes can help boost your super balance. Here’s how contributions work, how much you can contribute to your super and how to do it.
There are 24.4 million super accounts in Australia with assets totalling $3.9 trillion. Find out the latest superannuation statistics.
Here’s what you need to know about changing super funds including how to do it, the fees that apply, how long it takes and the pros and cons of switching.
Here’s how to choose between the different investment options offered by your super fund, including balanced, growth and ethical options.
Read our overview of superannuation fees you may be required to pay.
Steps to choose a beneficiary for your superannuation fund proceeds in the event of your death.
Unsure whether to use your extra income to contribute to your super or buy shares? Here are some of the benefits of each.
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.