For a market to work properly, consumers have to be informed and interested in chasing down the best deals. However, when it comes to superannuation, most people are not giving it much thought.
They end up in their employer's default fund. The government has legislated to protect the interests of disengaged fund members, particularly those employees working for small employers where the default super can be expensive.
Under MySuper, which starts on January 1, default investment options must be low-cost, commissions cannot be paid from the options to financial planners, and fees, such as entry fees, are banned while exit fees are limited to cost recovery. The default options of the non-profit funds typically have about 70 per cent of the money invested in "growth" investments such as shares and property and 30 per cent in "defensive" investments such as fixed interest and cash.
If there is a sharemarket crash, older members are left with a depleted account balance and not much time left in the workforce. The banks and insurers are taking the MySuper changes as a cue to launch super funds with a twist. These new funds have asset allocations that change automatically as the fund member ages.
Last week, the Commonwealth Bank launched its Essential Super - Lifestage fund, which automatically adjusts the fund members' asset allocation to reduce the risk as they age. Westpac-owned BT's Super for Life and ANZ's Smart Choice Super also have default options that take the life-stage approach, though fund members can choose an investment option that is "balanced" or is invested in a single asset class such as Australian shares.
With the life-stage options, members are put into an option depending on the decade they were born. They will have the decade of birth as part of the option's name - 1950s, 1960s, 1970s.
Warren Chant, co-founder of researcher Chant West, says, typically, life-stage funds start reducing risk from about age 35 to 40. Up until this age, the asset allocation is about 90 per cent to growth investments and 10 per cent to defensive investments. The asset allocation reduces gradually to about 20 per cent to growth and 80 per cent to defensive by the time the fund member is aged 65 to 70. In assessing how they may work, Chant points to the "10, 30, 60 rule". For each dollar spent in retirement, 10¢ comes from contributions while working and 30¢ from superannuation earnings while working. But about 60¢ comes from earnings in retirement.
"If 60¢ comes from earnings in retirement, then a low proportion of growth assets in retirement is going to have big impact on lifestyle," Chant says.
The retiree runs the risk of having a lower account balance with a life-stage fund than with the 70-30 investment options of the big funds, he says. There needs to be more work on the implications of these life-stage funds, he says.