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.

Saranga Sudarshan's headshot
Analyst

Saranga Sudarshan was an insights analyst at Finder. He has a PhD from the University of St Andrews in political philosophy. Previously he was a research analyst at Frost & Sullivan. Saranga loves cricket, sports analytics and the way data can provide novel insights. See full bio

Saranga's expertise
Saranga has written 22 Finder guides across topics including:
  • Personal finance
  • Data analysis
Gary Ross Hunter's headshot
Co-written by

Editor, Insurance

Gary Ross Hunter was an editor at Finder, specialising in insurance. He’s been writing about life, travel, home, car, pet and health insurance for over 6 years and regularly appears as an insurance expert in publications including The Sydney Morning Herald, The Guardian and news.com.au. Gary holds a Kaplan Tier 2 General Advice General Insurance certification which meets the requirements of ASIC Regulatory Guide 146 (RG146). See full bio

Gary Ross's expertise
Gary Ross has written 647 Finder guides across topics including:
  • Health, home, life, car, pet and travel insurance
  • Managing the cost of living

More guides on Finder

  • Worst Super Funds

    Here’s a current list of the worst-performing super funds in Australia and steps for how to switch to a better fund.

  • Hostplus vs HESTA

    Hostplus and HESTA are two popular industry super funds, but which is right for you? We've compared their fees, investment options and performance side by side to help you choose.

  • AustralianSuper vs Rest Super

    AustralianSuper and Rest are two popular industry super funds, but how do they compare on fees, performance and investment options?

  • AustralianSuper vs Hostplus

    Can't decide between AustralianSuper or Hostplus? We've compared their fees, performance and investment options side-by-side to help you choose.

  • AustralianSuper vs HESTA super

    Trying to decide between AustralianSuper and HESTA? We've compared their fees, investment options, performance and extras side by side to help you choose.

  • AustralianSuper vs Australian Retirement Trust

    Trying to decide between AustralianSuper and Sunsuper? We've compared their fees, investment options, performance and extras side by side to help you choose.

  • 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.

  • Superannuation investment options

    Here’s how to choose between the different investment options offered by your super fund, including balanced, growth and ethical options.

  • Salary sacrifice into your super

    This guide explains how salary sacrificing into your super works, how to set it up and what to consider before going ahead.

  • 6 ways to grow your super balance

    There are many ways you can grow your super, including salary sacrifice, making extra personal contributions and reducing your fees. Here are six easy ways to increase your super.

Go to site