Superannuation choices are confusing so most avoid them
Super choice is confusing so most avoid it. Photo: Getty
Superannuation fund members are confused by the level of choice offered by funds, new research has shown. And, not surprisingly, Australians have responded by mostly steering away from complex options.
The research, done for Industry Super Australia, found that 63 per cent of people surveyed believe that the range of superannuation products makes it hard to decide which product is right for people like them.
Experience seems to count for something here with 67 per cent of millennials saying that variety makes it hard to choose the right superannuation product, compared with 58 per cent of baby boomers.
Consultancy Rice Warner found that as of June 30, 2016, the super industry was offering more than 41,000 investment options. That’s nearly three times the amount available a decade ago, despite a halving of the number of funds in the market.
The trend “largely stems from an aim to give members the ability to tailor their asset strategy and provide the means to effect niche investment preferences”, Rice Warner said.
But according to official figures, people are ignoring the burgeoning range of choice options and the super industry is actually becoming more concentrated.
In its annual report published last week, the Australian Prudential Regulation Authority (APRA) said the big funds are hoovering up more of the available super money than ever.
“The top five funds accounted for 28 per cent of total industry assets at end-June 2017. This compared to just under 21 per cent a decade earlier,” APRA said.
Who the top five funds were in 2017 APRA has not yet disclosed. But the previous year’s figures are unlikely to have changed that much and the above chart details that.
Of the top six, two were industry funds – Australian Super and UniSuper – while two were retail funds, BT and Colonial. The remaining two were public sector funds – the Commonwealth’s public service fund and First State, originally for NSW public servants, but which mergers have effectively turned into an industry fund.
The thing to notice is that when it comes to choice, the industry and public sector funds offer a lot less of it than retail funds. The retail funds in the top six (used because No.5 and No.6 are virtually the same size) offer 734 options and 2759 options respectively.
Industry and public sector funds offer less than 25 with most in the teens. Within the different sectors, most members are avoiding choice or at least taking the simpler options.
Nathan Bonarius, research chief at Rice Warner, said “about 85 per cent of members in industry funds make no investment choice”, meaning they go with the default option. As the table shows, the vast majority of industry fund members go with default, while the figure is far lower for retail funds.
But while the retail sector might offer complex choice options, most of the money in the funds goes with relatively simple choices.
Over half the retail fund money is in the first 10 options. Source: Rice Warner
So most people aren’t using most of the choice available, which is lucky because the cost of funds offering complex choice could be cutting their balances by up to 32 per cent, or $294,000 over an average working life, Rice Warner has found.
To address the problem of excess choice, Rice Warner’s research advises: “To assist member decision making and avoid the paralysis that accompanies too much choice, perhaps funds should consider scaling back the number of options available.”