Too many super investment options diminish returns: report
Complex investment choices in superannuation harvest fees for retail super funds but deliver lower returns than simpler not-for-profit funds, according to new research.
An analysis by Industry Super Australia of 10-year performance data of Australian super funds to June 2016 shows, on average, funds offering fewer investment options performed better than funds that offered hundreds of options.
Bank-owned retail super funds, which offer an average of 651 investment options per fund, underperformed not-for-profit funds, which offer an average of 16 options per fund, by around 2 per cent per year on average over the 10 years to 2016, ISA’s Options to Lose report showed.
ISA found that 97 per cent of all investment options offered by APRA-regulated funds with 10-year returns are offered by for-profit funds, and 58 per cent of all options are offered by bank-owned funds.
When figures were further broken down, a clear relationship became evident between poor performance and a large number of investment options.
Funds in the top performance quartile (25 per cent) offered an average of 12 options. Meanwhile, funds in the bottom quartile of performance offered an average of 540 investment options.
The value of having few investment options has been recognised by even the most sophisticated of investors. ISA’s research showed that the top performing fund over the 10 years of the analysis was the private non-profit fund that investment bank Goldman Sachs & JBWere runs for its staff. It has only one one investment option.
The Reserve Bank of Australia’s staff fund has only 10 investment options. The banks appear to understand this also, as non-public-offer staff funds at three of the major banks, which sit in the top performance quartile, have a maximum of 10 investment options.
“It is odd that these institutions, which espouse the benefits of choice and offer hundreds, even thousands, of investment options to customers, keep their own staff funds simple,” Industry Super Australia CEO David Whiteley said.
There are some exceptions to the trend with a handful of funds, some of which are Eligible Rollover Funds for lost and inactive accounts with a limited number of investment options, sitting in the bottom performance quartile. However, not one fund in the top performance quartile has more than 30 investment options; and two-thirds have fewer than 15, the report found.
“Most Australians, busy raising families and paying off mortgages, don’t have the time to weigh up hundreds of investment options in the complex superannuation market,” Mr Whiteley said.
For-profit fund providers profit from complex member choice arrangements by collecting brokerage and fees as people swap options, Mr Whiteley said.
“This appears to be a deliberate business strategy to boost parent bank profits at the expense of fund member returns.”
Complex options also reduced fund performances by forcing funds to hold too much liquidity to cover for switching decisions. As a result, “retail funds forego the opportunity to invest in better-performing, but less liquid, long-term assets such as infrastructure”, the report said.
“Sales techniques, slickly marketed as ‘choice’, seem to be designed to bamboozle consumers and certainly don’t appear to be improving super nest eggs,” Mr Whiteley said.
The New Daily is owned by a group of 28 industry super funds.
