Low fees and astute asset allocation have given super balances a huge boost over the years
You’ve probably been on a winning streak without knowing it. If your super’s been sitting in a default investment option, you’ve been earning great returns year after year – all of it compounding nicely. You’d have to think twice before ditching it for something else.
For the past 25 years, the default investment option, also called MySuper, has delivered 5% a year above inflation, according to Morningstar. It’s a remarkable achievement and demonstrates how well the product’s asset allocation and low fees have worked.
Michael Rice, CEO and founder of Rice Warner Actuaries, says 5% a year above CPI over 25 years is extraordinary growth. “Almost all long-term investment performance is based on asset allocation. If you have a diversified portfolio which is full of growth assets it will grow more than inflation and wages, so people get significant, real returns.”
MySuper’s low fees have also paid off. Super fund trustees, who are required by law to act in their members’ best interests, have worked hard to bring fees down to below 1%.
“When you are getting down to an operating cost of 40 basis points [0.4%] or 60 basis points or even 70 basis points, it’s a pretty low cost,” says Anthony Serhan, managing director, research strategy, Asia-Pacific, at researcher Morningstar.
Rice says default super, strengthened by the industry reforms in 2011, has been a great success story. He attributes this to the prescribed minimum standards to which MySuper products must adhere to qualify for compulsory employer contributions, including restrictive fees.
While fund members can switch to other investment options, known as choice products, most stay in MySuper. But now the demographic most open to disruption, millennials, or the internet generation, are being targeted by new fintech players.
Researchers are concerned their slick marketing on social media and investment hype will lure financially inexperienced millennials out of the protections afforded them by MySuper into trendy investment choices that have high fees and no track record to speak of.
Rice says increasing regulation and scrutiny of default super has made choice products a more attractive target for businesses seeking to profit from the super system. He says the new entrants are spending more on recruiting members than on delivering long-term value.
As an example, he cites Spaceship’s GrowthX option. Its pitch to potential members is: “We invest where the world is going, not where it’s been.”
“I’m not trying to single them out because there are all these funds – about 35 of them – and they are much the same,” says Rice. “A fund like Spaceship comes along and says we’re going to invest in all these brand new startups but in reality while they don’t have that much money [in the fund] they’re investing in much the same way as traditional funds and doing it more expensively and perhaps with less investment prowess.
“I have no problem if a start-up comes along and says not only are we the same price as AustralianSuper, we’ve got these great investment strategies that are going to make you at least the same amount of money as them, and deliver all our communication on your mobile, all the things young people might find interesting, but you can’t do that at the expense of the value that they are going to get on retirement.”
Rice Warner compared AustralianSuper’s default option with an investment target of CPI plus 4% a year with a target of CPI plus 2.5%. For a 25-year-old on $75,000 a year the difference at retirement would be $296,400. A higher fee of 1.6% was used, which some startups have been charging, and is another drag on returns.
Campbell Heggen, a lecturer in financial planning at Deakin University, says: “One of the main concerns we’ve seen around the new entrants is that because they are start-ups they have lower scale, which means that the overall administration and back office costs have to be passed onto a smaller base of members.
“Their average annual fees are quite high compared to the more established larger funds, to what the larger funds can offer due to economies of scale. The concern is, are the members getting value for money? I think that is the biggest concern.”
Criticism of Spaceship has had an impact. It recently announced it had cut its fee to 0.99% and took a swipe at the industry, accusing it of being disengaged from young members.
Heggen says there are lessons to be learnt from the start-ups. “OK, so perhaps we have concerns around the high fees of some of these entrants and whether or not they have the experience to offer the product they are trying to deliver but they’ve obviously captured the market’s attention and that says something in itself. Maybe we should be trying to look at why they are experiencing some initial success and what that means in terms of how we could better engage with the broader market and the younger generation in particular.”
“One of the issues with super, particularly for younger people, is they don’t see the relevance of it because it’s such a long time horizon and they don’t understand the benefits of saving early and the long-term benefit of compound interest.”
Heggen says anyone thinking of switching out of MySuper into a choice product should read the fine print carefully. “If it’s charging excessively higher fees, and not offering potential for a higher return, you must question the value of that particular option.”
Morningstar’s Serhan also recommends caution. “Low cost isn’t always best but paying an extra 0.5% or 1% a year for an option just because it looks nice probably isn’t a great financial decision. It’s best to go back to basics.”
A recent survey conducted by Industry Super Australia found fees and performance were members’ two highest priorities, with technology among their lowest priorities.
Finally, Rice believes the same oversight that applies to MySuper should apply to choice products. “It’s very important to have regulatory conditions that stop people from being ripped off, particularly because super is compulsory. If you’re forcing members to put money into super, there’s an onus on the government to make sure the money is looked after.”
Many people, such as the Actuaries Institute, think MySuper’s “dashboard” requirement should also be extended to choice investment products. The dashboard distils key information: the investment option’s target returns, actual returns, level of investment risk and fees, all presented in a standardised way so consumers can easily compare products.
Meanwhile, if you’ve stayed in a default fund through inertia or disengagement or because you haven’t had time to chase the latest hot investment fad, don’t beat yourself up. Give yourself a pat on the back instead. The default fund will have done you proud.