One of the most disturbing reports coming out this week was not about the surprise election result but about superannuation.
A staggering 25% of people who thought they were in industry funds are actually in retail super funds.
When you consider that superannuation is usually the biggest or second biggest investment most people have, it shows an alarming level of ignorance and apathy about an asset that is absolutely crucial in having a successful retirement.
The research was commissioned by the Australian Institute of Superannuation Trustees, which represents not-for-profit funds, and included a poll of more than 500 retail fund members and individual discussions to see how people made their superannuation decisions.
Lack of engagement common
What they found was an alarming lack of engagement, along with widespread ignorance and misconceptions, including the fact that 25% who were investing through retail for profit funds thought they were in industry funds.
Many people also thought they had to work in a specific industry to join an industry fund, even though most industry funds are open to all investors.
They also had very little appreciation of what caused different investment returns, with the assumption being that super funds performed similarly over the long-term, with short term fluctuations put down to luck.
This is not the first survey to find an alarming level of disengagement with superannuation but it is a worrying one because it shows that not even the most basic information about their super fund had been identified.
Big drivers are fees and asset allocation
The concern is not so much about whether people have selected an industry or retail fund – there are very good and very bad examples of both around – but rather, whether as much thought has gone into choosing a fund as had been put into which brand of milk or eggs to buy.
Choosing between superannuation funds is not quite as simple as choosing between different types of grocery items but it is not that much more difficult and making the right decision at an early age can make the difference between retirement being a constant struggle or a dream.
The two basic building blocks of super fund decision making are the level of fees charged and the risk profile the individual chooses.
In the broad, industry funds and other non-profit funds have lower fees than retail funds, although that is not a universal rule.
A Productivity Commission report last year found that on average, retail funds underperformed not-for-profit funds in most asset classes.
Whichever type of fund you select, it should have relatively low fees because over a long period of time higher fees dramatically reduce investment returns, even if the money is invested in identical assets.
The other really big determinant of the success or otherwise of a superannuation fund is the asset allocation, which is usually chosen by the member on the basis of their risk profile.
Again, speaking broadly, younger people will have a relatively higher tolerance for risk because of their long investment time frame compared to older people, who do not have as much of a chance to recover from years in which super funds record negative returns.
Although super funds call these asset selections a variety of names such as balanced, growth, aggressive or conservative, the basic principle is the same.
The higher risk/higher reward funds will have a greater allocation to riskier assets such as local and offshore shares and a lesser allocation to lower returning but safer bonds and cash, while the reverse is the case for low risk or conservative funds.
Choose free range and avoid the cage
So, the two really important things to look at when selecting the right super fund are the level of fees and the investment choice, although other factors such as the amount and type of insurance are also important.
Once the right fund and asset allocation/risk profile is selected – along with the right level of insurance – then it is actually possible to become more disengaged with your super.
However, it is vital that an informed choice is made as early as possible and then the only task is to check up on returns every year and make sure that the fund is performing as expected relative to similar funds and that the fees are not creeping upwards.
Hiding from the truth and pretending that your fund is something that it is not or that all funds have the same returns is not a solution, even though this research suggests it is a popular strategy.
Look at it this way, taking the time to select the right fund early will give you the ability to make a lot of more pleasurable choices later on in life.
It may not be as simple as choosing between different sorts of eggs but it is not dramatically more difficult and it could result in your retirement being free range rather than caged.