Who’s looking after your super? “Well, I dunno”
Who is looking after your retirement savings?
Twenty years after the introduction of compulsory superannuation, an alarmingly high proportion of Australians are unable to answer this seemingly simple question.
This week News Limited published rankings of the nations best and worst performing super funds over the past decade, based on their investment return after fees and taxes on their default product.
The results should be an almighty wake up call for all Australians about the benefits of shopping around when it comes to your super.
Looked at over the past five years, super returns are a bloodbath thanks to the global financial crisis. Indeed 6 million members saw negative returns on average over the five years meaning, with hindsight, they’d have been better off stuffing cash under a mattress - or having their super fund do it for them - to at least retain the face value of that money.
Over a longer time period the last decade - average annual returns are somewhat rosier. But they vary enormously between funds, from as low as 2.5 per cent - just barely keeping up with inflation - for the worst performing, up to 6.7 per cent for the best performing.
Some in the super industry are unsettled by this new focus on relative returns, arguing that past performance no guide to future performance. But that’s the ultimate get out of jail free card. Actually, ten years is a reasonable period in which to asses whether someone is relatively good at managing your money. If your mechanic kept failing to fix your car properly for ten years, would you keep going back?
Others in the super industry argue it is potentially dangerous to point out to people that they have lost money because they might pull out of shares just as a recovery is taking place.
But the discovery of losses might be just the shock we need to drive greater engagement with the way our super nest eggs are invested. About half of Australias retirement savings are invested in shares - one of the highest equity weightings in the world. Was that really such a good thing? With hindsight, it’s clear the 20 per cent plus yearly gains in share prices in the mid 2000s were unsustainable and the bubble burst in dramatic fashion. Looking forward, should more of our savings be invested in more conservative strategies like cash and fixed interested?
These are difficult questions. Ultimately, timing the market is not something most disinterested super savers are likely to succeed at it. But while you might not be an investing whizz, its worth making sure the people you pay fees to to manage your money are. It’s at least worth checking they’re not completely rubbish.
So consider again: who is managing your retirement savings?
First, congratulations if you can name your super fund. You know, those people who send you long and boring letters once a year that you immediate throw into a draw and never look at again.
But the buck doesn’t stop there.
The advent of compulsory super has spawned a huge and entirely government fed industry around managing Australias $1.4 trillion of retirement savings. Every day, of every week, 9 per cent of your salary gets pumped over to these guys to manage.
This has spawned a labyrinthine structure of people keen to manage your money and, of course, collect fees for their service.
Australians pay around $17 billion a year in fees to the approximately 350 super funds in Australia, including government funds, industry funds and retail funds.
For most workers, they are automatically signed up to the default super fund specified in their industrial award. For those not covered by award, it is up to the employer to choose a default fund. Which raises an important question: does your employer care as much as you do about earning the best return on your money? Your employer may pick a default fund based on other criteria, like how simple the fund is to deal with administratively, or, dare I say it, which offers the best freebie lunches or discounts on other financial products for the firm.
But that’s the end of it right? Your super fund manages your money? Wrong.
Most super funds do not actually invest your money directly, but outsource investment decisions to a panel of funds managers. These funds managers are big names like AMP, Colonial First State, State Street, Challenger and Perpetual. And they too, of course, expect a fee for their service.
How does your super fund decide which funds manager to go with? Again, by and large they outsource this decision too by employing asset consultants who make recommendations on which fund managers they should contract. Asset consultants are paid fees for this advice and youve probably never heard of them before. The biggest is a company called JANA (formerly John A Nolan and Associates) which since 2000 has been a fully owned subsidiary of NAB.
So for most people, your employer chooses a default super fund, which in turn chooses an asset consultant, which in turn chooses a fund manager to manage your money.
It’s a pretty long chain of command, along which fees are applied all the way, not to mention the potential conflicts of interest that arise because the big Australian banks own both the major super funds and the major funds managers.
No wonder many Australians are going it alone, establishing more than 470,000 self managed super funds in an attempt to minimise fees and get the best return for their money.
For the rest, it is important a default system is designed that protects the vast majority of savers who make no active choices about their super. Every step of this super chain needs more scrutiny and transparency applied. The Gillard Government is currently looking at ways to inject more transparency into the way that workplace default funds are selected.
It is also introducing a My Super low-fee, default product that will be offered by funds from next year. Hopefully, one day, a website could be designed - similar to the MySchool website - to allow savers to compare the long term returns on these products and vote with their feet.
Because as lazy as we may be about our super, Howard government reforms mean all Australians are free to choose their super fund.
At least part of the answer to the question of who is in charge of your retirement savings is: you are.
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