Protecting the interests of the disinterested
After years in the planning, the MySuper revolution is drawing near. From January 1 next year, compulsory superannuation contributions will have to go to your fund's MySuper-compliant default option.
An employer's default option is where compulsory super goes if employees don't choose a fund to manage their super. MySuper is designed to better protect the vast majority who don't take an interest in their super.
To receive the MySuper tick from the regulator, the default investment option will have to be low cost and commission-free, among other things. Fees, such as entry costs, will be banned, while exit fees will be limited to cost recovery.
SuperRatings head of research Kirby Rappell says that for members of non-profit funds, such as industry and public-sector funds, nothing much will change because those funds never had entry fees or commissions and their default investment options have already been rubber-stamped as MySuper compliant.
The biggest change will be for members of retail funds; those run by the big banks and insurers.
Most retail funds are opting to make a "lifecycle" option their MySuper-compliant default investment option. With lifecycle options, members are put into an option depending on the decade in which they were born. The funds will go by names related to the birth decades - 1950s, 1960s, 1970s etc - and, without the member having to do anything, the investment risk will be gradually reduced as they age.
This reduction in risk is achieved by cutting back exposure to "growth" assets, such as shares and property, while increasing exposure to "defensive" assets, such as fixed interest and cash. By the time the member reaches 65, for example, he or she may be holding about 20 per cent growth assets and 80 per cent defensive assets.
The default options of the non-profit funds typically have about 70 per cent of the money invested in growth investments and 30 per cent in defensive ones, with the asset allocation fairly static.
While the lifecycle approach is supposed to better match members' decreasing appetite for risk as they age, there is a potential pitfall. There is a rule of thumb that says for each dollar spent in retirement, about 60¢ comes from investment earnings in retirement. That's important to bear in mind when only 20 per cent of a lifecycle option may be invested in growth assets by the age of 65.
Growth assets, such as shares, produce greater investment earnings than defensive assets over the longer term. It could mean ending up with less in retirement.
The MySuper revolution is coming, but there's no need to feel rushed or pressured. While compulsory contributions from January 1 next year will have to go to the MySuper-compliant default, balances will not be shifted until July 1, 2017.
Fund members should review their situation and obtain advice where needed. Most funds offer some advice over the phone.
Watch Money's John Collett and Clancy Yeates discuss the latest personal finance news at theage.com.au/money.