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

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.