A Fresh Choice

When was the last time you heard a really good idea from the superannuation industry? Target Date Superannuation is taking off in the USA and Russell Investment's Heather Dawson now plans to sell it in Australia. The new product is based on your 'target date' of retirement and designed to optimise your timeframe. (A transcript of Michael Pascoe's interview with Heather Dawson will be availabe on Friday).
INTERVIEW TRANSCRIPT:

HD: Just throwing a bunch of new options and choices and investments at people, actually in many ways it’s counter to helping them choose and implement a disciplined investment strategy.

MP: Is actual growth of choice a problem?.

HD: I don’t think anybody would argue that having freedom and choices is a bad thing, right? And so I think choice is a good thing but what we’ve learned about, in terms of how to help people make decisions, if we have to clarify how to make those decisions and you have to recognise not everybody wants to go at it alone. Not everybody wants to just go off and be their own chief investment officer. You have to provide other alternatives for people, other solutions for them to make it easy for them to actually choose an investment strategy and stick with that strategy.

MP: You cite some psychological testing that shows that people can sometimes freeze given too much choice.

HD: We know and studies have shown that when the options become overwhelming people can actually be paralysed and they can just stop playing the game altogether. And particularly when it comes to saving and preparing for retirement. You want to empower people, you don’t want to freeze or paralyse them.

MP: What sort of examples can you give?

HD: Well interesting, there’s been a number of examples but even outside of the financial industry the great article written by a gentleman by the name Swcharz that actually points to university graduates as one example. That when University graduates are going through the job search process they found that the more job possibilities those graduates had the more difficult it was for them to even make one decision of which job should I take and in fact a lot of those graduates were more dissatisfied with the whole job search process the more possibilities they had. And it was because they feared making a wrong decision. Feared choosing a wrong job. And then to the actual industry, financial industry example, studies have also shown in [401K] plans for example the more investment options the more choices that investment firms or employers would put on the menu of choices for employees, sometimes the less likely they were able to even chose one of those funds, and so they failed to make a decision at all.

MP: It’s human nature that fears making the wrong decision.

HD: That’s exactly right. Regret is very powerful for people and sometimes they’ll stay on the sidelines and stay paralysed versus jumping in and making a decision because they don’t want to face that regret.

MP: US401 system is about 20 years older than Australian Superannuation choice. How has it been evolving to get around that problem.

HD: After the end of the incredible run in the market and after we saw.. after the decline of that market we really started an industry, being able to look at the real return investors were getting, we recognised that if we left people just on their own to try to be their own investment officers that they actually really struggled with that, and I mentioned earlier they did a lot of damage to their portfolios. In fact one study by Delbar says they gave away 2/3rds of their potential return just by their investor behaviour. That was a real wake up call for the 401K industry and it said not everybody can go it alone. So it shifted us from just education and more choices for people and it really drove us to think of what sort of real solutions, real investment solutions can we give people that want to delegate the investment responsibility to the professionals and set the asset allocation and I’ll stay the course, stay in that fund for retirement. So it paved the way for more and more investment'¦ sort of innovations. Providing complete portfolio solutions for the average American worker.

MP: And that’s lifestyle funds and target date funds.

HD: Yeah, that’s exactly right. So what evolved is what the US calls lifestyle funds. There’s two different types of lifestyle funds. One is traditional diversified portfolio so based on an investor’s risk tolerance they can say this is the diversified fund that’s right for me and it again simplifies the asset allocation process. You choose the fund, you’re automatically diversified. But the next innovation was actually in introducing what was called target date funds which if people had a tough time deciding which sort of diversified portfolio they wanted to be in, all they then had to do was to say well, when do I think I’ll retire and they’d choose a fund that aligns with their retirement date and then the asset allocation would start more aggressive early on and would become more conservative automatically for those investors as they approach retirement date.

MP: What’s the US experience being on people making a decision but then setting and forgetting.

HD: Most people struggle to make an asset allocation decision initially. That was one problem. And then you’re exactly right. Most people fail to ever look at that again and rebalance and so that’s the power of lifestyle type funds or asset allocation funds. If it helps make that first decision a bit easier for people and then if they choose to, they don’t have to necessarily look at their ongoing rebalancing, or their ongoing asset allocation unless their needs change.

MP: Your target date, is it more expensive because of it’s constantly updating the portfolio, constantly rebalancing.

HD: The actual target date portfolios are no more expensive than are traditional diversified portfolios so there’s no charge for the ongoing professional management and the dynamic rebalancing of the target date funds.

MP: Initially you’re just marketing this through your corporate superannuation clients.

HD: We will include these as a part of our super solution master trust for our corporate clients and so for the members of those funds we’ll be presenting for them a series of ways they can diversify for retirement. Target date is one of those and the diversified portfolio is another one of those. But that’s our initial market. We’ll continue to look at opportunities either through our advisers, whoever relationships to actually provide this type of solution to more Australians.

END