No need to spread savings across funds
Given the importance of diversification, it is fair to ask whether we should diversify our superannuation by having it spread across more than one fund. I would argue it is not necessary. Nothing is guaranteed, but our large super funds are well regulated. They have to report regularly to the regulator on how the money is invested.
It would be very difficult for someone working in a position of responsibility at a large fund to divert the money that was meant to be invested into their own pocket. But, of course, it has been done.
It occurred at Trio super in 2009. Under the federal government's compensation scheme if the loss is because of theft or fraudulent conduct, all members of large funds are levied to compensate those members who lost money.
This is what happened with Trio. However, those who invested in Trio through their self-managed superannuation funds were reminded that they were outside the compensation scheme. Trustees of self-managed funds are also outside the Superannuation Complaints Tribunal. So if there is dispute among dependants over the distribution of death benefits, for example, their only recourse is the courts.
There is a reason that trustees of self-managed superannuation funds may want to keep some money in a large fund. That is because large funds have good deals on life insurance. Large funds usually have automatic acceptance. An individual with a self-managed fund, depending on their medical history, may be rejected for insurance or charged high premiums.
Another reason most people would not want to have more than one fund is costs. That is because funds have fixed costs, such as a weekly member fee, that are charged per account, regardless of how much money is in the account.
The proliferation of super accounts is one of the reasons why there is about $18 billion in "lost" superannuation. People switch jobs and start another fund with the new employer, or move house without always informing the old fund of their new circumstances.
All in all, when it comes to super, there is no argument for saying diversification is a good idea.
But that is a different question from the importance of diversification in how the money is invested through a fund.
Default investment options, which are the options where most people have their money, take care of diversification by spreading the money between the various asset classes.
Rolling over old funds into the current fund reduces the costs without increasing the risk of having all of your retirement savings with one superannuation fund.
Watch Money's John Collett and Clancy Yeates discuss the latest personal finance news at theage.com.au/money.
Frequently Asked Questions about this Article…
According to the article, it’s generally not necessary to split your super across multiple funds. Large super funds are well regulated and must report to the regulator, and keeping money in one fund can reduce duplicate fees. The more important consideration is diversification of investments within your chosen fund, not necessarily holding several super accounts.
Large funds are well regulated and regularly report to the regulator, which makes diversion of member money difficult. However, fraud has occurred (for example, the Trio case in 2009). Where losses result from theft or fraud, the federal compensation scheme can levy members of large funds to compensate affected members.
The article highlights a few downsides of SMSFs: they are outside the federal compensation scheme for theft/fraud and outside the Superannuation Complaints Tribunal, so disputes (such as death benefit disagreements) may end up in the courts. Also, SMSF members may miss out on large-fund insurance benefits and could face higher costs if they maintain multiple accounts.
Large funds usually secure better life insurance deals and often provide automatic acceptance for members. By contrast, an individual seeking insurance inside an SMSF could be rejected or charged higher premiums depending on their medical history, which is why some SMSF trustees keep part of their savings in a large fund for insurance cover.
Yes. Many funds charge fixed per-account costs (for example, a weekly member fee) regardless of the account balance. Multiple accounts therefore add up in fees, which is one reason advisers recommend rolling old accounts into your current super to reduce costs.
The article attributes the roughly $18 billion in lost super to the proliferation of accounts: people change jobs and open new employer funds or move house and don’t inform their old fund, leaving small balances unmerged and effectively ‘lost’.
No. The article explains rolling over old funds into your current fund reduces costs without increasing the risk of having all your retirement savings with one fund. Default investment options in large funds typically spread money across asset classes, providing diversification within the fund.
Diversifying across multiple super funds (having several accounts) mainly increases costs and complexity and is not recommended in the article. Diversifying investments inside a fund means spreading money across asset classes (shares, property, fixed interest) — something default investment options in large funds already do for most members.
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