Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 207

When no decision is the right one for super

Superannuation is awash with choices and opportunities to engage with your retirement savings.

You can usually choose which fund you want to contribute to. You can choose from an array of investment options, salary sacrifice extra contributions or make voluntary contributions from your take home pay. You can even choose to split your super contributions with your spouse, perhaps the ultimate test of a successful domestic partnership.

Or, you can choose to do nothing … and let the default MySuper option of an established super fund do the work for you.

The majority of Australian workers actually choose the last option and accept the super fund selected by their employer.

Insights into super members

Vanguard recently partnered with one of Australia's largest multi-employer super funds, Sunsuper, on a major research project titled How Australia Saves. This research uses the same methodology that underpins a benchmark research publication in the US titled How America Saves which has been published for the past 17 years.

How Australia Saves covered the 1.1 million members of Sunsuper using member level transactional data for the five years ended June 2016. The objective of the research programme is to provide deeper insights into the member experience.

Given that it is mandatory for all employers to contribute 9.5% to super for their staff earning at least $450 per month, it is no surprise that the majority of people in the study did just that. The study showed 83% were invested in the Sunsuper lifecycle default option at June 2016 compared to 5% in the diversified balanced options. Only 12% took the self-directed route and selected their portfolio from the 30+ options on the menu.

Our super system is often questioned for what is perceived to be the lack of engagement of the majority of members.

The comparison is made with the system in the US called ‘401(k)’, which is a voluntary system - both for employers and employees - and hence US workers ostensibly need to be more ‘engaged’ in the decision to both join the fund and select their level of contributions. As a result, employers in the US and the retirement plan sponsors put a lot of effort into designing the 401(k) plan including options such as auto enrolment and auto escalation of contributions. Both of these options are on the rise in the US system and somewhat paradoxically rely on the inertia of investors to be increasingly effective.

Different outcomes from investment options

One of the key pieces of analysis in How Australia Saves was to understand how individual members fared within their various investment options.

For the majority of members invested in the default lifecycle option, the return was a very uniform 8.3% p.a. over the five years. The returns that members received were tightly clustered as you would expect from a pooled fund where most members had the same asset allocation. Any dispersion came from the Sunsuper option managing members’ risk as they get closer to retirement. People over age 55 receive a progressively more conservative asset allocation (less equities, more fixed income) in order to reduce their market risk as they approach retirement.

The second category of investment options was a single diversified fund that suited members' risk profile, including conservative, balanced or growth. These members had a wider range of returns from 5.9% to 8.3%.

The third category of investors were those who had opted to take the self-directed route.

The choice architecture of the super system is fundamentally important in a mandatory system as it gives people the ability to tailor their super portfolios based on their individual circumstances. But with this level of engagement comes responsibilities and risks, demonstrated with a much wider dispersion of returns from 5.1% to 8.4% p.a. for the self-directed members in our research sample.

The members who opted to select their own investment options may well have had good reasons for doing so and are comfortable with their decision. However, when looked at on a risk/return spectrum and in aggregate across the whole membership, the stark result is that the default lifecycle option delivered higher returns at a lower risk than those achieved by nearly all self-directed investors.

DIY super takes time

While involvement and engagement with your super fund are generally regarded as a fundamentally good thing there is a flip side, as people who set up a self-managed super fund understand all too well. The onus is on you to monitor and adjust your portfolio as markets inevitably move around.

One of the advantages of the default and the diversified options of large super funds is that the portfolios are implemented and monitored by the investment professionals that work for the fund. The asset allocation is regularly rebalanced, for example, to stay within the tolerances the fund has set.

When you take the self-directed route the portfolio management responsibilities rest with you. And managing your super portfolio is not most people's full-time job and neither should it be. There are plenty of life's short-term priorities - the day job, raising families, studying, taking holidays - that can easily turn the attention away from the super portfolio.

Not all default funds are created equal, so it pays to understand how your default fund compares and what the costs are. But one of the lessons out of the How Australia Saves research is that, if taking a direct hand in managing your investment portfolio inside super doesn’t appeal to you, letting the MySuper default system work for you may be one of the best decisions you never have to make.

 

Robin Bowerman is Head of Market Strategy and Communications at Vanguard Australia. This article is general information and does not address the circumstances of any individual.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.