SMSFundamentals | Jun 23 2020
SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.
For an introduction and story archive please visit FNArena's SMSFundamentals section on the website.
Australians Largely Uninformed About Their Super
Australian super accounts have taken massive hits throughout the coronavirus pandemic highlighting the lack of knowledge the average Australian has about how their super fund works.
-Two-thirds of Australians assume super funds de-risk during a market downturn
-67% of Australians don’t know how their super is invested
-The average growth super fund dropped -10% in the March 2020 quarter
By Danielle Austin
In a continuingly volatile market new research has shown that many Australians are unaware of how their superannuation funds act to protect their money during market cycles.
In a survey completed by Russell Investments in January, results showed that two-thirds of Australians believed their superannuation funds would automatically reallocate their investments during market downturns regardless of the portfolio they have opted into, while more than a third thought their superannuation investments were managed based on their personal circumstances even when they did not actively choose how their super was invested within their fund.
The results feed into a larger conversation around the lack of knowledge Australians have about how their superannuation funds are invested.
Knowledge is key when it comes to investment decisions, with appropriate asset allocation being one of the strongest factors to building an adequate retirement fund, but 67% of Australians do not know how their super is invested or simply opt into their fund’s default approach to investment.
Russell Investments Research Highlights Lack Of Knowledge
According to Russell Investments’ Managing Director Jodie Hampshire, more work needs to be done to ensure savers are aware of their options in managing their retirement funds.
“Our research shows choosing investments within super remains a minefield for many working Australians, leading to misinformed choices, or no choice at all,” said Ms Hampshire.
Australia’s retirement savings market already had a gap of -$1trn in required funds in 2015. That deficit is expected to grow to -$9trn by 2050, and research shows that savers who take a hands-off approach to their retirement savings are more likely to retire with insufficient funds.
According to the research, those who have made an active choice in how they invest their super are far more likely to have also set goals around the amount they want to save or spend in their retirement. By knowing when they can afford to take more risks with their investments, and when to make more conservative decisions, savers can significantly increase their funds.
Experts have suggested that personalised investment strategies for savers could be a better approach to bridge this gap.
The current defined contribution superannuation system leaves Australians exposed through market shifts. While almost half of Australians have set a goal for their super, almost 70% do not know if their super is on track or are aware that their super is behind where it needs to be.
Giving people the information to take a more individualised approach to their superannuation fund management and retirement plans could help them better weather inevitable market cycles, said Ms Hampshire.
“A key weakness of our current system is its inability to deliver investment strategies that address individual retirement goals. Super funds are serving up one-size-fits-many approaches to investing that might look sensible on average, but in the real world, nobody is average,” said Ms Hampshire.
Experts have suggested the current approach to superfund investment is too generalised and that a personal, goals-based strategy for each customer, based on their retirement goals, would give better results.
One-size-fits-all Doesn’t Suit All
According to Russell Investments’ survey one in five Australians were unaware they could make choices about their super investments. Personalised super strategies could also go some way in educating savers on their choices and equalising retirement funds.
A shift to individualised superannuation investment based on customer needs would follow trends set by other industries such as the retail and health and wellness sectors, where technology is being applied to optimise results for individuals.
In the current one-size-fits-all approach to superannuation, where funds are defined for the taxpayer, assumptions are placed on what the average retirement experience looks like and how long the average retiree will require their lifestyles funded.
The reality is there is no average experience and the current approach fails to take into consideration that retirement is also tied to wider ambitions, such as a desire to spend more time with family or to pursue hobbies and passions, which should factor into retirement savings planning.
Currently, Australia operates on a compulsory superannuation system which requires employers to make regular super contributions of at least 9.5%.
Many argue this system is inequitable and leaves many more vulnerable groups, including women and lower income earners, without enough to retire with. Increased education on investment and retirement planning, particularly among these groups, could go some way to decrease this inequity.
Target-Date Investing Strategy
In Australia, balanced portfolios continue to be a popular investment option, but target-date investment strategies might be an attractive alternative for savers looking for that more personalised approach.
While allocation differs between funds, in a balanced investment portfolio around 70% of equity can be expected to be allocated to shares and property and the remaining 30% in fixed interest and cash.
A balanced fund expects reasonable returns with lower risk than a growth portfolio, making it feel like the safer middle-of-the-road option for many and is often the default choice for those who don’t opt for a different portfolio.
However, growth or high growth portfolios may be a good option for growing retirement funds during years when investors can weather higher risk options.
A growth portfolio typically allocates around 85% of equity in shares and property and only 15% in fixed interest and cash. Growth funds are expected to accumulate higher returns over a long-term period, but the associated higher risk also indicates the portfolio will take a bigger hit in market downturns.
With a balanced investment fund asset allocation remains consistent throughout the working life of the saver, however market risk may be more or less important throughout the life of the saver.
For younger or middle-aged savers, for example, market volatility should be less of a consideration as they have a relatively longer time in the market than savers closer to retirement age.
A target-date superannuation fund adjusts asset allocation in line with the individual’s retirement age goal. This strategy adjusts the risk level of the investment portfolio in line with the savers capacity to take risk; as the length of the investment period shortens, the riskiness of the asset allocation is reduced so that generally market exposure declines with age.
Target-age investment strategy encourages taking more risk with investments earlier when the distribution of earning ability is more flexible.
Although risk-averse savers may be opposed to taking risks, it is argued that the advantage of increasing funds at a young age outweighs the risks of market downturns, while savers are young enough to wait out market cycles.
While a target-age strategy is not completely personalised, it is a step in the right direction for client-based retirement planning. The downfall is that target-aged funds are still designed for groups of individuals rather than to achieve optimal retirement outcomes for each customer.
Compared to retirement fund systems around the world, Australia has a particularly high range of final retirement outcomes, meaning while some Australians retire with an adequate nest egg, many do not. A lack of personalisation in investment strategy could be one reason for this.
It has been further argued that Australia’s retirement savings market could be strengthened by higher diversification, and particularly diversification into foreign investment markets. Geographical diversification could help superannuation funds weather market cycles isolated to one country.
While there is no one right way to manage your superannuation during a recession, a general review of your funds and retirement plan is always a good idea.
Ensure your super is consolidated into one account to reduce your fees and stick with a long-term plan rather than making quick decisions during a downturn.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
