No need to spread savings across funds

Regular readers of personal finance columns will be aware of the importance of diversification. We have it drummed into us that it's a good idea to spread our investments around, whether between asset classes such as shares, property and fixed interest, or not having all of our Australian shares exposure to Commonwealth Bank shares.

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.