When no decision on your super is the right one
Superannuation is awash with choices and opportunities to engage with your retirement savings.
You can usually choose which fund you want to contribute to. You can choose from an array of investment options, salary sacrifice extra contributions or make voluntary contributions from your take home pay. You can even choose to split your super contributions with your spouse, perhaps the ultimate test of a successful domestic partnership.
Or, you can choose to do nothing… and let the default MySuper option of an established super fund do the work for you.
In fact, most Australian workers actually choose the last option and accept the super fund selected by their employer.
Insights into super members
Vanguard recently partnered with one of Australia's largest multi-employer super funds, Sunsuper, on a major research project, titled How Australia Saves. This research uses the same methodology that underpins a benchmark research publication in the US titled How America Saves, which has been published for the past 17 years.
How Australia Saves covered the 1.1 million members of Sunsuper using member level transactional data for the five years ended June 2016. The objective of the research is to provide deeper insights into the member experience.
Given that it is mandatory for all employers to contribute 9.5 per cent to super for their staff earning at least $450 per month, it is no surprise that most people in the study did just that.
The study showed 83 per cent were invested in the Sunsuper lifecycle default option at June 2016 compared to 5 per cent in the diversified balanced options. Only 12 per cent took the self-directed route and selected their portfolio from the 30+ options on the menu.
Our super system is often questioned for the lack of engagement of most members.
The US system, called ‘401(k)’, is voluntary – both for employers and employees – so US workers ostensibly need to be more ‘engaged’ in the decision to both join the fund and select their level of contributions.
As a result, employers in the US and the retirement plan sponsors put a lot of effort into designing the 401(k) plan including options such as auto enrolment and auto escalation of contributions. Both of these options are on the rise in the US system and somewhat paradoxically rely on the inertia of investors to be increasingly effective.
Different outcomes from investment options
One of the key pieces of analysis in How Australia Saves was to understand how individual members fared within their various investment options.
For the majority of members invested in the default lifecycle option, the return was a very uniform 8.3 per cent p.a. over the five years. The returns that members received were tightly clustered as you would expect from a pooled fund where most members had the same asset allocation.
Any dispersion came from the Sunsuper option managing members’ risk as they get closer to retirement. People over age 55 receive a progressively more conservative asset allocation (less equities, more fixed income) in order to reduce their market risk as they approach retirement.
The second category of investment options was a single diversified fund that suited members' risk profile, including conservative, balanced or growth. These members had a wider range of returns from 5.9 per cent to 8.3 per cent.
The third category of investors were those who had opted to take the self-directed route.
Having choices in the super system is fundamentally important in a mandatory system as it gives people the ability to tailor their super portfolios based on their individual circumstances. However, with this level of engagement comes responsibilities and risks, demonstrated with a much wider dispersion of returns from 5.1 per cent to 8.4 per cent p.a. for the self-directed members in our research sample.
The members who opted to select their own investment options may well have had good reasons for doing so and are comfortable with their decision. However, when looked at on a risk/return spectrum and in aggregate across the whole membership, the stark result is that the default lifecycle option delivered higher returns at a lower risk than those achieved by nearly all self-directed investors.
DIY super takes time
While involvement and engagement with your super fund are generally regarded as a fundamentally good thing, there is a flip side, as people who set up a self-managed super fund understand all too well. The onus is on you to monitor and adjust your portfolio as markets inevitably move around.
One of the advantages of the default and the diversified options of large super funds is that the portfolios are implemented and monitored by the investment professionals that work for the fund. The asset allocation is regularly rebalanced, for example, to stay within the tolerances the fund has set.
When you take the self-directed route, the portfolio management responsibilities rest with you. And managing your super portfolio is not most people's full-time job and neither should it be. There are plenty of life's short-term priorities – the day job, raising families, studying, taking holidays – that can easily turn the attention away from the super portfolio.
Not all default funds are created equal, so it pays to understand how your default fund compares and what the costs are.
However, one of the lessons out of the How Australia Saves research is that, if taking a direct hand in managing your investment portfolio inside super doesn’t appeal to you, letting the MySuper default system work for you may be one of the best decisions you never have to make.
Do you use the default super system? How does it stack up against self-managed funds in your opinion?