Choice is good. More choice is better. But is there a limit?
The French have a saying: “trop de choix tue le choix" (too much choice kills the choice).
That might sound delightfully abstract most of the time. But in the case of superannuation, death by excessive choice doesn’t actually seem all that far-fetched.
In a market where everyone essentially wants a similar outcome – to invest a portion of their wages to create a retirement nest egg – there is an unbelievable level of customisation possible.
Currently there are some 40,000 superannuation investment options. 39,200 are options for retail fund members.
It's important to note the stark difference between retail and industry super funds when it comes to investment diversity.
At last count, the median industry fund had 16 investment options, whilst the median retail fund had almost double. While no industry super funds has more than 100 investment options, there are 18 retail funds with over 1000 options, and a further 24 with over 100.
More choices, fewer returns
Many super members may believe that having more choice and greater control over investment options delivers better returns.
That makes superficial sense. But the Productivity Commission isn't buying it.
An analysis of net returns – the returns you get after you take out fees – shows that funds offering 300 or more investment options returned 1 per cent less per annum than funds offering 10-15 investment options.
The Productivity Commission estimates that a full-time male employee who retires at 67 after commencing work at 21 would be $140,000 to $230,000 worse off by choosing a fund with numerous investment options when they reach their retirement age.
How not choosing can sometimes be a better choice
But what about if you don't choose at all?
If an employee does not nominate a superannuation fund, his or her employer is legally obliged to pay that employee’s super into a default investment option.
Since 1 July 2017, all default investment options are 'MySuper' options. MySuper options are 'vanilla' investment options that satisfy uniform requirements set out by the Australian Prudential Regulation Authority (APRA).
MySuper options charge low fees (although fees still differ significantly between funds.) They are subject to fee disclosure requirements, including a statement of the annual fees on a $50,000 balance. MySuper options are either ‘balanced’ or ‘lifestage’ investment options.
Around half of super member accounts are in default products. But if an employee chooses to nominate his or her own superannuation fund instead of accepting their employer’s default option, they will have the capacity to choose their investment option or options.
As we have seen from the Royal Commission, in many – although not all – cases, individuals would have been better off by defaulting to a basic MySuper product than picking themselves.
The choice is yours
In the end, the choice is, well, yours.
But before you get sold on one of the 40,000 options out there, it pays to (1) shop around and (2) know the basics of what's out there.
Check out our basic investment options glossary below.
Know your investment options
Generally considered to be the lowest-risk investment option, members’ super is deposited with a bank that will pay interest on the investment. Cash investments may either be a ‘term deposit’ or ‘on call’.
Where cash is invested as a term deposit, in exchange for a higher interest rate, a member cannot withdraw those funds for a defined period of time. Where cash is invested on call, a member’s funds are always available but a lower interest rate is provided.
Certain cash investments are also guaranteed by the Australian Government, meaning that the Government will repay to members any of their capital that the banks cannot.
Slater and Gordon has commenced a class action against Colonial First State on the basis that certain cash investment options were not invested with members’ best interests in mind.
Instead of obtaining the best return for members, Slater and Gordon alleges that Colonial prioritised the interests of the CBA by effectively providing it with ‘cheap cash’ at the expense of members.
Diversified Investment Strategies
Investment options that invest members’ super in diversified asset portfolios. Different portfolios will have different proportions of growth assets and defensive assets. Growth assets generally include Australian and global shares, infrastructure and property. Defensive assets generally include fixed interest bonds and debentures, and cash deposits with banks. Common investment strategies include:
Investment options that intend to provide some long-term growth but with stability over the medium and long-term. Around 60-75% of assets are allocated to fixed interest or cash investments.
Investment options that intend to provide long-term growth with a reduced long-term risk but a possibility of short-term volatility. The majority of funds invested are generally allocated to growth assets, but a significant part of the portfolio remains invested in defensive assets. MySuper options that are not lifecycle investment options will be balanced investments, and balanced investments overwhelmingly tend to be the most popular of all investment options. Australia's largest super fund, AustralianSuper, for example, reports over 90 per cent of its members are invested, at least in part, in its balanced option.
Investment options that intend to maximise capital growth with the consequence of increased risk in the short, medium and long-term. Very few assets are allocated to defensive investments, allowing for increased growth but also increasing exposure to market downturns and fluctuations.
Investment options with a particular investment strategy (generally balanced), that invest assets in accordance with various ethical principles. For example, most ‘socially aware’ investment options will not invest in companies that are involved in the production of coal, munitions or tobacco, or that have been involved in human rights scandals, or that do not meet certain gender representation targets. The exact guidelines for investment will vary between funds but these investment options aim to guarantee to members that their super will not be used to support companies to which they are morally opposed.
Many superannuation funds offer a variety of investment strategies (e.g. conservative, balanced, high-growth) as an indexed fund. Indexed funds differ from regular funds as they are not actively managed, meaning that investment costs are reduced as there is no fund manager actively buying and selling assets. Indexed investment options reflect the investment strategies of their actively managed counterparts, but invest in entire asset classes rather than a selection of assets within that class. For example, the ‘Australian shares’ component of an indexed investment may be invested equally in each of the S&P/ASX 200 companies (the 200 largest companies listed in Australia) rather than a selection as determined by the fund manager.
Lifestage or Lifecycle
Investment options in which the investment strategy is automatically adjusted based on the member’s age. When a member is younger, their super is invested in a high-growth portfolio, consisting predominantly of Australian and global shares. As the member grows older, their super is shifted to progressively more defensive portfolios that emphasise stability over growth. Members are generally switched to a different ‘lifecycle’ every five or ten years depending on the fund. Around 30% of funds invested in MySuper Products are invested in lifecycle options.