The Productivity Commission has finally released its recommendations for the superannuation system. And not before time – there is nearly 3 trillion dollars in the system, and billions of dollars of fees are deducted each year from the retirement savings of the average Australian. Despite the 40,000 superannuation products out there, it remains one of the least competitive industries in Australia. In a nutshell, this means you are probably paying higher fees than you need to. And that your standard of living in retirement will be lower than it should be.
Who is responsible for this lack of competitiveness?
There are a few causes of this:
- Most members (yes, that probably includes you!) don’t exercise their right to select their super fund. They end up in what is known as a “default fund” which is chosen by their employer or by legislation in employment contracts. You wouldn’t let your employer or the government choose where you eat, where you shop, what clothes you wear, where you live or what car you drive. So why do you let them choose how one of your largest assets is managed and invested?
- Switching super funds can take a lot of time (or at least it was until Plenty provided free advice around which super fund you should be in and can help you implement the changes). So, members tend to stick with the same old fund they were in before. Once again, I hold the members responsible here.
- Once a super fund has been selected as the default it is happy days for them because they have a guaranteed supply of new members. So, there is no need to innovate or perform. You can’t blame the super funds here, it is the system that drives this behaviour.
What has the Productivity Commission Recommended?
The good news is that the Productivity Commission has recommended a solution to these problems. The bad news is that it won’t help you.
The recommendation helps new entrants into the superannuation system, ie people entering the workforce for the first time and immigrants. Instead of default super funds being selected by legislation and employers, entrants into the system will be able to make a choice between 10 independently selected top-performing funds. This is great for the new entrants. But it doesn’t do much for people already in the system.
To be fair – the Productivity Commission also recommended that when you change jobs your new employer will no longer put your contributions into a new fund but rather into your existing fund. This will encourage consolidation of your existing super funds. This will avoid the estimated $2.6bn issue of having multiple super accounts arising from multiple employers.
But What if Your Existing Super Fund Doesn’t Cut the Mustard?
Yes, that’s a problem isn’t it. And the Productivity Commission hasn’t proposed a solution to this problem. Ultimately, they are saying “Caveat Emptor”. Let the buyer beware. Or to put it differently, if you don’t take the steps you need to take to get yourself into a better super fund, then nobody else is going to do it for you.
So, are you going to take the required steps? Or retire in poverty? If you are looking for an easy and low-cost way to get advice about the right super fund for you then Plenty could be your answer.
Greg is the co-founder of Plenty. He has been a financial adviser for the last 7 years. Priory to that, Greg ran the life insurance division of life insurer MLC.
The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.