Starting a new job can be equal parts high stress and high excitement.
A young relative recently embraced the excitement of gaining their first full-time job – a rite of passage into the world of independent adulthood in many ways.
She also took the time to pause – if only momentarily – to consider superannuation.
Not surprisingly for someone working in a range of part-time jobs while studying at university she found she had multiple super funds. Step one was a no-brainer – consolidate them and reduce the multiple sets of fees both on the funds and on multiple insurance policies.
The online consolidate instructions to enable her target fund to do the hard work of going out and rounding up her other bits and bobs of super was simple and effective. Job done.
Step two began to look much more challenging – there were text messages and Facebook alerts now competing for what seemed an ever diminishing level of attention.
Yet there was so much to cover – the importance of setting long-term goals, investment choices, the need for discipline, the enormous power of making extra contributions and finally – but no means least – unlocking the secrets of asset allocation to tailor your investment portfolio to your personal risk level.
But the clock was clearly ticking so it was mutually agreed we would cover just one of these important topics that day and the others would be revisited in instalments at a date to be arranged. After all there is only so much excitement a 20-something can handle in one sitting.
So my 45-minute lecture on the importance of the asset allocation decision, it’s power in driving the portfolio results and why oodles of academic research tells us this is the pre-eminent decision we all make as investors was condensed into a 5-7 minute version aka speed dating investment style.
Two things emerged from this rather pressured exercise. The young generation of today are clearly a lot more adept at multi-tasking than my much older generation because while answering multiple electronic signals there did seem to be some understanding that as a young investor in a super fund you will not be able to access the funds until well into your 60s – that part both registered and almost shut down the conversation immediately – and when it came to asset allocation why not take the high risk/higher potential reward option?
Great question. Why not indeed. So let us look at the various investment options the super fund offered on the choice menu. While not as extensive as some it had all the usual suspects in the lineup – a range of premixed diversified funds targeting the spectrum of risk profiles as well as funds focussing on specific asset classes like Australian shares, international shares, property both local and international and a range of fixed income options. There were also options to pick funds with an ethical, social and environmental screens.
Then we started to delve into the notion of rebalancing. While not an onerous or difficult concept to grasp the idea of revisiting the super fund portfolio once a year was met with a level of incredulity … I have to review it every year for the next 40 years …really? Why can’t the super fund just do it for me?
Well it can, and that’s where the conversation pretty much ended and the social media interaction resumed normal service.
Now to some in the super industry that exchange points to one of the fundamental flaws in our superannuation system – the lack of engagement of fund members in making their own investment decisions.
The reality is that within super around 80 per cent of people are in the default fund offer. And some highlight that as a measure of low engagement with super.
Yet research that Vanguard published earlier this year – How Australia Saves 2017 – that was done in conjunction with industry fund Sunsuper showed that rather than being an issue the fund members in the default investment fund actually enjoyed higher returns over the 10-years ending June 2016 than those people who made direct investment decisions.
This may surprise some people but it points to the challenge every fund member faces. When making your own investment selections your first point of comparison should be against your fund’s default offering that is generally being managed by a full-time team of investment professionals.
The core strengths of the Australian super system are its near universal coverage, mandatory contribution regime and choice architecture. Low engagement may well be the trade-off we have to accept for the high level of coverage but alternatively perhaps we are measuring the wrong thing by focussing so heavily on engagement in investment decisions.
Because there is no guarantee that when people make choices they are guaranteed to make better choices.
Now there are 230 super funds in the market and certainly some do things better than others so the time you need to be most engaged is in the decision to select a good, well-diversified, low-cost fund and then let the default product go to work for you.