A recent report into independent research conducted by money educator Vanessa Stoykov revealed that 10% of Australians don’t trust superannuation funds.
Although that figure may seem modest, it’s nonetheless concerning. After all, superannuation is compulsory for most workers and is the vehicle that will fund retirement for a significant portion of the population.
While Australians generally keep a keen eye on the value of their home, bank accounts, investments and income, superannuation is often neglected.
Equating to over $2.7 trillion in assets owned by over 15 million members, there is a big possibility that an Australian’s superannuation nest egg will be one of the largest assets in their lifetime. This should make it well worth including on the list of assets to actively keep an eye on.
It is certainly possible that Australians’ distrust of superannuation funds stems from the Productivity Commission’s inquiry into superannuation a few years ago. Focused on products and their return, the findings were alarming to say the least.
- Ending up in an underperforming MySuper (default) product = 10 years’ lost pay
Due to the power of compound interest, a worker who ends up in the median bottom-quartile MySuper product would retire with a balance significantly lower than if they were in the median top-quartile product.
Cost to member at retirement: $502,000 or 45% less.
- Paying for an unsuitable insurance policy = 2.5 years’ lost pay
The premiums that come out of members’ accounts erode their retirement balances. The effects are worse for members on low incomes or who work intermittently, as they continue to have premiums deducted from their accounts while not contributing to their super.
Cost to member at retirement: $85,000 or 14% less.
- Being a member of a high-fee fund = 2 years’ lost pay
Australians pay over $30 billion a year in fees on their super (excluding insurance premiums). An increase in fees of just 0.5% can cost a member tens of thousands of dollars.
Cost to member at retirement: $100,000 or 12% less.
- Unintentionally holding multiple accounts = 1 year’s lost pay
According to the Australian Taxation Office, about six million Australians held two or more super accounts as at 30 June 2018. These accounts are created when workers change jobs or industries and don’t close their old account or roll over their existing balance.These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.
Cost to member at retirement: $51,000 or 6% less.
Interestingly, the superannuation inquiry did focus on what we believe is most important – the lifetime impact of:
- a default superannuation and fund selection compared to a recommendation from a financial planner that is optimal for an individual’s financial circumstances, goals, and possibilities
- having a set and forget view on superannuation as opposed to having the optimal strategy strategically implemented and tailored for the individual to make the most of it, and
- not considering superannuation as a piece of a far bigger financial puzzle which is ultimately designed to create financial security.
As stated in the Productivity Commission’s report, many members simply default into a fund and product, and rely on their fund to manage their super for them (whether out of trust, a lack of interest or an inability to compare products themselves). As a result, rates of switching between funds and products are modest.
Default arrangements are necessary in a compulsory super system to protect members who do not make their own investment decisions. The downside is that these policy settings have created an ‘unlucky lottery’ for members by failing to ensure they are placed in the most appropriate funds for them.
On closer inspection, it is no wonder 10% of Australians do not trust their super funds!
If you haven’t checked your super’s health lately, are concerned about its performance, or are wondering if you will have enough to live a comfortable retirement, please contact our Superannuation Division on (03) 9810 0700 or email@example.com.