You can be an $876k winner in the super fund lottery
It would be unusual for someone to buy their home unseen, without research, especially given the sum of money involved. Yet when it comes to super it's a different story.
People mistakenly assume their employer's default fund, called MySuper, has been professionally assessed and carefully selected and that it is one of the best there is. But that's not the case and there's no legal obligation for employers to do that.
Alex Dunnin, executive director of research and compliance at Rainmaker Group, publisher of Money magazine, says all an employer is obliged to do is put you in a default fund that complies with the law and has a tick of approval from the superannuation regulator, the Australian Prudential Regulation Authority (APRA).
"An employer's job is to put the right amount of super money into the right fund, at the right time, but they are not responsible for whether it's a good or bad fund," says Dunnin.
Businesses don't have the resources or expertise to research the vast number of default products on the market. Some are offered inducements by financial institutions to favour their default product over their competitors. This is unlawful.
The Australian Securities and Investments Commission (ASIC) recently pointed out that although "employers are not required to consider their employees' best interests when making decisions on default super funds, their decisions can significantly impact employees' retirement income and potentially affect their future financial security". It's a flaw in the system that concerns many.
The Productivity Commission's review into super calls this failure a "lottery" for too many consumers. It recommends employers be required to choose a default fund from a shortlist of top performers.
Rainmaker's research shows you may be more than $876,000 worse off over your career if you happen to be in the worst fund. You would leave work at 65 with $455,000 compared with $1.3 million in a top-performing fund.
"There's such a big range in performance between the top and bottom funds. Some of the good funds do two or three times better than the worst ones no matter what period you look at. That's why it matters what fund you're in," says Dunnin.
It's in your best interests to be proactive. Here is a short checklist to help.
First, do you trust the institution behind the fund? Does it have a good track record? Second, what are its investment returns like? No one can predict future returns, but past returns, over five to 10 years, are a good indicator of a good fund.
Also check fees, as these can eat into your super. The good news is fees are falling because of the "sheer brutality of competition" and regulatory scrutiny, says Dunnin. "You do not need to be paying more than 1% in fees - the average is 1%. Many funds with fees below 1% are telling us that over the next couple of years they are going to go a lot lower."
Make sure your life insurance is well priced, too. "If you are under 25 you don't have to buy compulsory insurance," says Dunnin.
Finally, how responsive is your fund? Can you navigate its website easily and is its information easy to understand? If you get lost on the website doing something as simple as consolidating default accounts or switching funds, that's a bad sign.
"It should be really easy. And above all it's free. Be very wary of people saying they can help you 'and by the way it's going to cost $2000'. If they say that, just run," says Dunnin.
A broken system
Research by Super Consumers Australia, a new advocacy group, shows more than 170,000 people landed in a dud default fund in 2017-18. The group wants super fixed so consumers can only be defaulted into the top funds.
Acting director Xavier O'Halloran blames a badly designed default system.
"What's worse is that the industry is resisting changes which would ensure people end up in better performing products," he says. "We need regulators to take real action to weed out these laggards."
Super Consumers Australia was launched in September in partnership with the consumer advocate CHOICE. Its mission is to keep the super industry accountable and fair.
To check your fund's performance go to the SelectingSuper website.