It's a risky business not getting involved

MANY fund members with little interest in their superannuation will benefit from the federal government's Stronger Super measures slated to start October 1, 2013. From that date, the government will force employers to direct super contributions for employees who have not chosen a fund into a low-cost "MySuper" account.

This product will have a standard set of fees, pay no commissions and invest in a single diversified portfolio.

The legislation will require all existing default super fund accounts to be transferred to a MySuper product by July 1, 2017. This will be the end of a very lengthy process that aims to protect members from paying excessive fees and commissions.

Before former Labor treasurer John Dawkins's action in the 1990s, funds were not even required to inform members of their fees and charges. As a result, several widely marketed products paid commissions as high as two-thirds of all contributions made in the first two years. Inevitably, many Australians who wanted to do the right thing lost out.

Today, rigid product disclosure requirements, combined with competition from low-cost industry and wholesale retail funds, have improved the situation.

And the MySuper product, the brainchild of the Cooper inquiry into super, will ensure clients of industry, retail and other public-offer funds are protected.

Nevertheless, these protections cover only the millions of Australians who allow their employer or union to choose their fund for them. And there are benefits, even if only peace of mind, of being informed about the cost structures and investment options of your super fund - especially until the MySuper initiative is fully implemented.

For example, some people are still using the costly pre-Dawkins super funds, despite better options having been available for many years.

The government's latest actions will not necessarily protect these people and members of other high-cost funds. Only a conscious decision to switch (even if just for new contributions) to a lower-cost fund could do this.

Balancing fees and performance costs are, unfortunately, not the end of the story. Allowing your super fund to choose your investment option can end up being an expensive exercise, particularly in situations where you're about to withdraw your money or you rely on the regular income to pay a pension.

The September quarter just ended has been a costly one for millions of super fund members. Many default funds, as well as balanced and growth super investment options will, if they have not already, be reporting negative returns of between 5 per cent and 10 per cent for the three months.

In quite a few cases, this will mean long-suffering super fund members will need to wait at least another two years before their value of their assets returns to pre-GFC levels.

The accompanying information provided by Chant West shows conservative portfolio options (including cash and fixed-interest investment options) have generally outperformed higher risk options over a 10-year period.

The recent market turmoil in Europe and the US suggest it would be a bold call to predict that this situation will change in the short or even medium term. Spoilt for choice, the vast majority of superannuation funds offer members a wide range of investment options ranging from safe cash options to high-risk portfolios.

Choosing a suitable portfolio can be time-consuming and difficult and this may be the reason most super fund members opt to leave the decision to their fund. About 80 per cent of the members of the larger employer industry and retail super funds leave the choice of their investments to fund trustees, who as a matter of course invest the money in their default fund.

Unfortunately for many people, the large majority of default funds invest in higher-risk balanced and growth portfolios.

Even today after the jolt caused by the GFC, super fund trustees rarely adjust their default investment options to suit the age and risk profiles of their members.

The clear message is that all super fund members can profit from taking an interest in their super and pension funds. Even with the best intentions, government initiatives alone cannot guarantee positive returns, particularly in troubled times.

Daryl Dixon is the executive chairman of Dixon Advisory.