Employer's choice challenged

Employers will sometimes select the default fund provider with which they have financial dealings, Proebstl says. "The selection of a default fund should be driven by the interests of employees who are the owners of the savings being accumulated," he says.

What Proebstl is talking about is where a business has a financial relationship with a financial services institution, such as a bank. The bank's superannuation arm will offer to become the default provider and in exchange the business derives benefits such as discounts on fees or cheaper loans.

"It is a practice that is difficult to pin down and identify, which is why it continues to happen without being put into check," Proebstl says.

"In the United States, employers are banned from nominating a fund with which they have financial dealings. This is not the case in Australia."

Who gets to be the default fund provider is a big deal. If an employee does not nominate which fund they would like their super contributions paid to, their employer is required to direct their super contribution to a default super fund. Most people, when they start a new job, do not specify a fund and their contributions go to the default fund chosen by the employer. It could be said that it is the employer who is making the choice. But in workplaces covered by award agreements, the default fund is often nominated in the award.

The government wants the Productivity Commission to examine default fund arrangements.

It is going to be looking at industry funds and other not-for-profit funds and whether it is right that they are always the default provider in workplaces covered by an industrial award. Industry funds have representation from the union that covers the workers as well as the industry's big employers. As it turns out, generally, industry funds have outperformed for-profit funds. Chances are that if employers covered by awards were to put the management of default super out to competitive tender, where the tender was run by an independent actuarial firm, it would almost certainly be an industry fund that would win.

Some industries have specific needs from super. Dangerous occupations, for example, may require life insurance tailored to occupations, such as mining. Often industry funds are the best fit but then there is MTAA Super fund which, despite being at the bottom of performance tables, is still being selected by employers as their default-fund provider because the fund is nominated in industrial awards.

The commission should also look at whether some employers are handing over the super savings of their employees to financial institutions in exchange for commercial favours, as Proebstl believes.

For consumers, what this all means is that just because your employer has nominated a fund as the default provider do not think that is an endorsement of the fund. It could pay to have a look around at alternatives and make sure that the fund is best suited to your needs. The problem for consumers is that there is a lack of information and information that is made available by the funds can be confusing. There has to be a degree of trust that goes into the decision. Short-term periods of poor performance should not be cause for too much concern but long periods of under-performance should prompt questions.

Fund members should not be afraid to call their fund and ask for an explanation of the performance. But don't just focus on returns after costs. Life insurance cover is also important. Researchers SuperRatings (superratings.com.au) and Chant West (chantwest.com.au) make much of their research available free on their websites.