Reforms improve scrutiny on super
SHOPPERS can be a ruthless bunch. As the poor old retailers are finding out, many people won't hesitate to take their business elsewhere if they feel they're being dudded.
The internet only makes this easier.
Entire industries have sprung up offering online price comparisons for everything from books, to hotel accommodation, to home loans.
Funny, then, that this keen interest in getting the best value seems to vanish when we make one of the biggest financial decisions of our lives.
I'm talking about the $1.4 trillion sitting in superannuation.
For many people, their super balance will end up being their biggest asset.
But the very mention of it is enough to make many of us tune out instantly.
Just like some retailers offer better deals than others, so it is with super funds.
Official figures last week showed that among the biggest 200 funds, the best performer had returned 9 per cent a year since 2004, while the worst performers had returned less than 3 per cent.
Yet despite being given the freedom to choose our own fund in 2005, only about 5 per cent of people bother to change funds.
And when we do change funds, we don't go to those with the best track record.
Research from the Australian Prudential Regulation Authority has found "no significant relationship" between the amount of transfers to a fund and its rate of return over the past nine years.
"This suggests that a history of higher-than-average long-term rates of return was not a determining factor when members chose a fund into which to transfer their superannuation," APRA said last week.
Granted, there is a growing army of people who manage their own retirement savings, to save on fees and have more control of their investments.
On the whole, though, Australians are highly unlikely to shop around for the best super product.
So what's going on?
Why are so many people keenly seeking out the best deals when they shop for clothes and other things, but doing the opposite with their super?
The answers to these questions can be found in behavioural economics.
One of the key assumptions of orthodox economics is that consumers are "rational" beings, who are always on the hunt for the best deal possible.
But how we make decisions in the real world is very different to this.
When confronted with a baffling array of choices - something Australia's super system is notorious for - behavioural economists have found that we tend to procrastinate or do nothing.
In the United States, researchers found the share of people participating in pension plans decreased as the number of investment options increased.
Australian workers don't have the option of not participating in super. Instead, about 70 per cent of us do the next easiest thing and rely on the "default" investment option.
There's nothing wrong with using default options.
However, our disengagement means there is probably less competition on price than there should be.
While other industries such as retail are being forced to slash prices in response to stiff competition from online stores, research suggests super funds are moving much more slowly in response to competition from the self-managed sector.
Rainmaker Information has calculated that super fees have declined marginally in the past five years, from 1.32 per cent of assets under management to 1.26 per cent. But this has not been caused by a price war.
Instead more people are moving their money into low-cost funds, such as those that track a market index, and this drags down average fees across the industry.
Aside from procrastinating, the other thing we often do when faced with a complex decision is turn to an expert.
There's nothing wrong with this either - most financial advisers provide a worthwhile service.
But high-profile collapses in recent years have exposed what can go wrong when we put our faith in the advice of an apparent expert.
Collapsed financial planner Storm Financial, for instance, advised thousands of people to borrow against the value of their homes and put the lot into the sharemarket before the 2008 crisis. More than $3 billion was lost, with great hardship, when markets plunged.
There's no sure-fire way to prevent advisers from giving clearly inappropriate advice. But this story has an encouraging end, as policymakers have cottoned on to the insights from behavioural economics and are applying them in real life.
From July, all super funds will be forced to offer a no-frills option with low costs, diversified investments and no commissions.
People invested in their fund's default option will eventually be transferred to these "MySuper" products.
Financial advisers, meanwhile, will be banned from accepting commissions when they sign up new clients, and will have to work in the customers' best interests.
We'll still be free to choose from the huge number of super products.
But policies will no longer assume we want to weigh up the options - because most of us do the opposite.
With total super fees worth some $20 billion a year, parts of the industry have of course tried to water down the changes.
AMP Capital even invoked the section of the constitution made famous in the 1997 film The Castle in its push to soften laws requiring the transfer of billions to commission-free accounts.
Putting default members into low-cost MySuper accounts would deprive fund trustees and advisers "of their entitlement to fee income", it said, which may breach the section of the constitution that deals with acquisition of property "on just terms".
For the most part, though, the industry is getting on with it.
Funds are preparing to offer low-cost MySuper products, and many advisers are no longer accepting commissions before a ban comes into force from July.
It's likely that many of us, especially the younger generations, will remain "disengaged members" with little interest in spending hours pondering their super.
Fair enough, too.
But thanks to reforms informed by behavioural economics, it should become more difficult for firms to profit from our lack of interest.
Ross Gittins is on leave.