DITCH YOUR DUD FUND
5 WARNING SIGNS BOOST YOUR SUPER BY $60k IN 10 YEARS
The super industry has been ripping of workers for years with high fees, poor performance, multiple accounts and worthless insurance. But thankfully those days are numbered and our five warning signs will help you avoid the wrong options and choose a better place for your precious retirement savings.
After three years in the making, the Productivity Commission’s damning 722-page review of Australia’s seriously flawed $2.7 billion superannuation sector calls for a seismic shake-up. There’s also a concentrated focus on reforming the 1.6 million underperforming accounts held in MySuper funds, which after going unchecked for years have seriously damaged members’ retirement incomes.
By taking a blowtorch to the sector’s two single biggest issues – namely, the avalanche of unintended multiple accounts that command unnecessary fees and insurance (aka zombie policies) plus dud MySuper funds, the Productivity Commission hopes its proposed reforms will collectively save members $3.8 billion annually.
But the sector’s issues extend well beyond MySuper, with around five million accounts currently held in chronically underperforming funds, which if left to languish would cost the member an estimated 13 years’ pay over a working lifetime.
According to the commission’s report, a third of super accounts (around 10 million) are superfluous given that members already have a primary fund. The report also found that despite retail funds making up just nine of a group of 29 funds identified as underperformers, over three-quarters (77%) of accounts within these 29 are in retail funds, which have been “systematically outperformed” by not-for-profit (industry) funds.
While the commission is scathing of how individual super funds are managed, it also attributes much of the sector’s shortcomings to outdated structures and to a closed-shop mentality around where people’s money goes – namely, an obsolete default system. For example, chances are you’ve acquired a new super account with one or more employers, based on a set of funds decided by various industrial agreements.
One account for life
To permanently address the issue of duplicate accounts and fees, the Productivity Commission, together with the Hayne royal commission, wants members to only ever hold one (default) account, typically when they first join the workforce. When people change or add jobs, their super contributions would go to their current active account unless they nominated otherwise.
These changes are likely to see super funds denied millions of new accounts, each of which accrues fees and charges every time a worker begins at another employer. As a result, the number of Australians incurring unnecessary costs on the three-plus super funds they accumulate on average during their working lives should progressively fall.
The commission is also recommending changes to the default super system so that new workforce entrants are encouraged to consider choosing from a “best in show” model comprising 10 to 20 funds that, based on their track record, are most likely to continue performing strongly in the future. As a result, smaller and less competitive industry funds, currently guaranteed new business by virtue of being listed as the default in workplace agreements and awards, also stand to suffer.
The commission would also like to see all APRA-regulated funds carry out an annual outcome test across their portfolios. Those that repeatedly fall short of their stated benchmark by more than 0.5% a year over a rolling eight-year period would have 12 months to sharply lift performance or risk being forced out of the market.
The net effect would also see perennial underperformers get out of super altogether, which would potentially migrate millions of Australians into stronger funds. Based on commission estimates, moving from the bottom 25% of funds would deliver an average gain of $188,000 to someone entering retirement.
$533k boost for nest egg
Proposed changes to default super aside, the commission has made another 30 or so key recommendations to turn superannuation around. Assuming these recommendations are implemented (the coalition government has agreed to them in principle), the commission claims Australians entering the workforce
would be up to $533,000 better off by the time they retire.
Based on other proposed changes to put both industry and retail sectors under increased scrutiny and competition, the commission also expects those in their mid-50s to be $79,000 better off in retirement.
Included with other proposed reforms are plans for all super accounts that have a balance less than $6000 or have been inactive for 13-plus months to be consolidated into one account by the tax office and APRA to ensure money goes to the right individual. The commission is also calling for a ban on all trailing financial adviser commissions from MySuper accounts, with all fees charged by super funds to be levied on a cost-recovery basis.