The ATO has released a super health check – here’s what I would have told you instead
The ATO recently came out with a ‘super health check’. Here’s what I would’ve put into it.
There are few opportunities for an everyday person gets to reach millions of people and pass on a message that may be able to help or aid them. The ATO has access to every tax-paying adult. They recently used their reach to try and improve superannuation outcomes by sending out a two-pager with five tips on it. The summary of these tips were:
- Check your contact details
- Check your super balance and employer contributions
- Check for lost and unclaimed super
- Check if you have multiple super accounts and consider consolidating
- Check your nominated beneficiary
This release was followed by some dire statistics that came from a MoneySmart survey. It found that almost half of all millennials—the first generation to have superannuation for the entirety of their working lives—admit they are not knowledgeable about maximising their super.
Here’s what I would add, if I was able to pass on a message to all Australians with a super account.
Take a closer look at your asset allocation
Roger Ibbotson, a Professor of Finance, author and founder of Ibbotson Associates summed up asset allocation decisions pretty well. He said that on average, 90 per cent of the variability of returns, and 100 per cent of the absolute level of return is explained by asset allocation.
What Ibbotson meant by this is that the mix of assets that you have in your portfolio is a key factor in your returns. Asset allocation is a tight rope for superfunds. They have to remain scalable, while appealing to the risk and return expectations of different life stages, incomes, and objectives.
It’s important to understand the asset allocation mixof your super as it will determine your retirement outcomes. If you’ve never reviewed your super before, it is likely that you have been placed in the ‘balanced’ option. AustralianSuper, Australia’s largest superfund, has over 90% of their members in the Balanced Option.
I’ve written previously on why it’s important to get your asset allocation right at a young age. I’ve modelled the marked difference it can have on your outcomes. It can result in hundreds of thousands less at retirement if you don’t get this right early in your career. It can also result in unnecessary risk for older Australians that are too exposed to aggressive assets, even as they are drawing down on them in retirement.
Even if you are in a ‘balanced’ fund and you feel that it is right for you, take a deeper look. ‘Balanced’ is not a universal definition, so it is important to understand what your super fund considers ‘Balanced’. You can have up to 20% differences in allocations to asset classes, which means that you’ll be comparing apples with oranges in terms of performance and fees.
Take for example, Australian Super’s Balanced option—it can hold a range of Aussie shares between 10 and 45%—it currently holds 21%. A balanced fund with Rest Super can hold between 11–21% Australian shares—it targets 16%. Then—you look at QSuper’s Balanced option—they’ve got 9.6% in Aussie equities. There are additional discrepancies in the allocations to each asset class in each option. It is important to understand the underlying holdings because ,again, over a period of 30–40 years, a misallocation at an early stage could cost you hundreds of thousands of dollars.
Don’t panic
In 2020, the Morrison government brought in legislation that required superfunds to meet an annual objective performance test. The purpose of this was to root out underperforming super funds. Those that underperformed were not able to accept new members and had to inform current members of the underperformance. Is this a good thing?
One thing to remember with superannuation is that especially for aggressive funds, the fund managers are basing their allocations on long time horizons. What this legislation does is punish superfunds for underperforming over the short term and discourages this long-term outlook.
What should investors do about this? The first thing is to ignore the government’s focus on short-term returns. There’s nothing that mandates that you must remove yourself from investments if they underperform. There is nothing that says that a one or even three-year return is the final determinant of your retirement outcome. Switching funds like this can be to the investors’ detriment—we call this impact the behaviour gap.
We conduct a study called ‘Mind the Gap’. We look at the return achieved by a fund and then we look at the return received by an investor—these are markedly different. The fund return is based on the underlying assets in the fund. The investor return is based on the inflows or outflows of actual investors deciding to buy into a fund or sell out of the fund. Those inflows and outflows have no direct impact on the performance of the fund, but the timing of your investments have a huge impact on the return that you get.
We have published our latest installment of the research , finding that investors lost out on around 15% of the returns their fund investments generated over the 10 years ended Dec. 31, 2023. It found that fund investors earned a 6.3% per year dollar-weighted return (“investor return”) over the 10 years ended Dec. 31, 2023, while their fund holdings earned about 7.3% per year (“total return”). This is one of many studies that show this impact. It’s important to remember because it can be tempting to switch and chase those returns.
Don’t look at performance without context
We have heard the phrase ‘past performance is not a reliable indicator of future performance’ ad nauseum. It’s the truth. Every year, when the list of top performing superfunds are released, the top performers see huge inflows. I had a look at the top ten performing super funds month by month over the last year—it changed almost every single time. This is why performance in the traditional sense doesn’t have a weighting in Morningstar’s fund research methodology—meaning—they don’t rank funds based on their past performance.
What is important is relative performance compared to the fund’s benchmark over the long-term. Super funds will have an investment objective that they are looking to reach, and this is where you can see how they’ve stacked up against this. We can use Australian Super as an example. Looking at the high growth option, the investment objective is to beat CPI + 4.5% over the medium to longer term. It recommends a minimum investment timeframe of 12 years.
When we look at performance—it has achieved that. Returns are 7.90% p.a. over a 5-year period, and 9.04% p.a. over a 10-year period (at 30 June 2024). Based on relative performance to its benchmark, Australian Super has achieved its objective.
Conclusion
At a recent roundtable organised by ASIC, ASIC Commissioner Simone Constant said, ‘I encourage superannuation fund members to think of themselves as a customer. As a customer, you have choices and can demand services match your needs as you would from other financial services providers, such as your bank or insurer.’
I’ve put together some of our best resources on getting your super right here. Small changes that ensure your super is optimised for you can be the different between a comfortable retirement, and a not-as-comfortable retirement.
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