With super, it pays to check your employer's choices.
Most superannuation savings are held in "default" funds - the funds selected by employers to receive the superannuation guarantee - and most employees are happy to go along with that decision.
But is it the best choice when factors other than performance may be given greater consideration?
Fund members need to be aware that other considerations come into play when that selection is made.
For workplaces covered by industrial awards, which cover about 1.5 million workers, the default fund is usually named in the industrial award.
These are mostly not-for-profit industry funds, the boards of which have equal representation by the relevant unions and the larger employers in the industry.
However, if there is no award governing the super guarantee contributions, the employer is free to select any complying fund as the default provider.
Not-for-profit funds are happy to be judged on performance. They have outperformed the retail sector - funds provided by the banks, insurers and master trusts - over the long term. (Although the gap in performance is closing as the retail sector launches lower-fee funds.)
A report recently released by Industry Fund Network, the umbrella group representing industry funds, found during the past 15 years (1996-2011), retail funds underperformed not-for-profit funds by more than 2 percentage points a year.
The report said: "Over the 15-year period, if retail funds had earned industry fund returns, Australian retirement savings would currently be $75 billion higher."
In June, the Productivity Commission issued a draft report after the government had asked it to look at whether there should be changes in the way that default funds are selected. The commission said that opening up default funds to competition would benefit members.
The retail sector has long labelled award super as anti-competitive and has been itching to be able to compete with not-for-profit funds to become default providers. Large employers not covered by industrial awards tend to hire asset consultants to select who should be the employers' default providers. But for other employers, especially smaller ones, the costs of running a tender are too expensive.
Smaller employers are inclined to give the management of their employees' super to the super arm of the bank with which it does business.
A senior consultant at Rice Warner Actuaries, Bill Buttler, says in most case default funds are "pretty good" funds. The bottom line is it is not enough for employees to trust that their employer's default fund is the best for them.
Buttler advises they read the product disclosure statement and check the website.
Reforms will improve offerings
From October next year, the government will require balanced investment options to meet MySuper criteria before they can be selected as an employer's default fund.
Fund members are always free to choose any complying super fund.
Fund members who do not exercise "choice" will, from October, have their super guarantee contributions go to their employers' MySuper-compliant investment option. And, from the middle of 2017, members who do not exercise choice will have their balance shifted to a MySuper investment option.
MySuper investment options will need to have a broadly diversified investment strategy and offer a minimum level of life insurance to all fund members.
MySuper will have lower costs because commissions and ongoing financial advice fees will be banned.
Frequently Asked Questions about this Article…
What is a default super fund and how is my employer's default selected?
A default super fund is the fund your employer uses to receive Super Guarantee contributions when you don’t make an active choice. If your workplace is covered by an industrial award (about 1.5 million workers), the award usually names the default fund. If there’s no award, the employer is free to select any complying fund as the default, and large employers often hire asset consultants while smaller employers may use the super arm of the bank they deal with.
How do industry (not-for-profit) super funds compare to retail super funds?
Industry or not-for-profit funds (often named in awards and governed by boards with equal union and employer representation) have tended to beat retail funds over the long term. A report covering 1996–2011 found retail funds underperformed not-for-profit funds by more than 2 percentage points a year and said Australian retirement savings would be about $75 billion higher if retail funds had earned industry returns. The article also notes the performance gap is closing as retail providers launch lower-fee funds.
Should I just accept my employer's default super fund or should I check it?
You should check it. A senior consultant quoted in the article says default funds are “pretty good” in most cases, but it’s not enough to simply trust your employer’s choice. Members are advised to read the product disclosure statement (PDS) and check the fund’s website to understand fees, investment strategy and insurance before deciding whether to stay with the default or choose another complying fund.
What is MySuper and how will MySuper rules affect default super funds?
MySuper is a set of government rules for simple, low-cost default superannuation products. From October next year, balanced investment options will need to meet MySuper criteria before they can be selected as an employer’s default. Members who don’t exercise choice will have Super Guarantee contributions paid into their employer’s MySuper-compliant option, and from the middle of 2017, members who don’t choose will have their existing balances shifted into a MySuper investment option.
How will MySuper reduce superannuation fees and costs?
MySuper products must be simpler and lower cost. The rules will ban commissions and ongoing financial advice fees inside MySuper, which the article says will lower overall costs for members compared with many existing default options.
What investment and insurance features will MySuper options have?
According to the article, MySuper investment options will need to have a broadly diversified investment strategy and offer a minimum level of life insurance to all fund members, making defaults simpler and more consistent across funds.
What did the Productivity Commission say about opening up default super funds to competition?
The article reports that the Productivity Commission, in a draft report requested by the government, said opening up default funds to competition would benefit members. This recommendation is part of the broader debate about whether employers should be able to choose retail providers as default fund managers.
What practical steps can everyday investors take to check if their default super fund is right for them?
Start by reading the fund’s product disclosure statement and visiting its website to check performance history, fees and the investment strategy. Compare the default’s long-term returns and costs with other complying funds, and remember you are always free to choose another complying super fund if you find a better fit for your retirement goals.
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