Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 125

Super engagement better than expected

In mandatory retirement savings systems like Australia’s Superannuation Guarantee, default options are critical. A ‘default’ is where the investment is chosen on behalf of the investor, such as by their employer. In other words, the investor accepts the default option. International research and experience show that ‘passive’ regulatory settings like defaults are far more important than those relying on active decisions like tax concessions. Super fund members face two key defaults: the fund itself and then the investment strategy.

The recent introduction of MySuper gave the superannuation sector a reason to review and renew default settings. And with the support of the Centre for International Finance and Regulation, the research paper, Delegation, trust and defaulting in retirement savings: Perspectives from plan executives and members, was commissioned to find out how well the refurbished MySuper defaults fit the people they are designed for. We interviewed superannuation fund executives and collected their impressions of member needs and characteristics, and the goals of MySuper defaults. Then we surveyed over 1000 members on their default behaviour, reasons for defaulting or opting out, and their superannuation goals.

More active choices than expected

More members described themselves as active choosers than we expected. The diagram below shows the proportion of members who stayed with the default fund and default investment option. Only 36% of our sample defaulted at both stages, meaning that 64% made at least one active choice.  Also, around one-quarter of members in the default fund and 9% of investment defaulters chose the default options deliberately. So the proportion of completely passive defaulters in our sample is probably below one-third. Clearly, not all defaulters are completely disengaged or uninformed, and conversely non-default choices are not a simple proxy for member interest and engagement.

Defaulters are more likely to be younger, female and have lower incomes than non-defaulters. As account balances rise and retirement approaches, the costs of a non-optimal default become larger and are likely to prompt more members to make another choice. Interestingly the financial literacy of defaulters was only a little lower than that of choosers and the difference was not statistically significant.

Interest, trust and defaulting

We also asked members about their reasons for defaulting versus choosing. Most people said they do not want to relinquish control over their retirement savings, but they found the products suitable, and viewed the fund as trustworthy and accountable.  Respondents in the default investment option emphasised more than others their own low skill and knowledge. Respondents in the default fund expressed more trust and belief that the system is well monitored. Time costs of active decision-making were rated high more often than money costs. These results are at odds with some industry commentary that characterises default members as uninterested in superannuation.

A lack of interest was not the main reason for delegating investment to the fund according to the survey (although it did have some impact), and neither is relinquishing control. However, interviews with fund executives suggested that trust is sometimes mistaken for disengagement. Trust, when combined with a self-conscious lack of financial skill, underlies both a low level of active choice and a low level of direct interaction with the fund.

Goals for superannuation

In terms of goals, members emphasised achieving a basic amount of wealth for retirement. This lines up with comments from interviews where executives framed default design in terms of retirement outcomes rather than short-term performance. However there is little agreement in the sector about what are the best strategies to reach this goal.

Members thought low fees were an important, but not the most important, aspect of a fund’s goals. This also seems broadly consistent with executives, who acknowledge that fees matter but view them as constraints rather than objectives.

A noticeable area of difference between executives and surveyed members relates to risk tolerance. The clear skew towards low risk tolerance among default members stands in contrast with relative aggressive investment strategies, where growth asset exposure averages over 70%. While life cycle funds are designed to de-risk near retirement, many executives express the view that default members need strategies with high growth asset exposure in order to generate higher balances and retirement incomes.

Regulators and industry might improve member outcomes by developing smart defaults that allow for a variety of risk preferences and demographics. The study emphasises the dangers of misconstruing super fund members as uninterested: instead, many see themselves as low in skill but high in trust.

 

Susan Thorp of the University of Sydney co-authored the research paper with Adam Butt of the Australian National University, Scott Donald of University of NSW, Doug Foster of the University of Sydney, and Geoff Warren of the Centre for International Finance and Regulation.

 

RELATED ARTICLES

Reply to Peter: Why a glide path makes sense, with equities for growth

Lifecycle funds increase super engagement

Are lifecycle funds appropriate for MySuper products?

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

Sponsors

Alliances

© 2022 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.