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High cost of switching
Mike Taylor
Major consultancy Watson Wyatt has warned superannuation fund trustees that the 2007-08 financial year will represent the first year since the implementation of choice of fund in Australia that superannuation returns have entered negative territory.
Watson Wyatt managing director in Australia Andrew Boal said that in the circumstances of negative returns and the choice of fund regime, many superannuation fund members would be tempted to exercise their choice and leave their loss-making funds for better-performing funds.
He said this was why members needed to understand the cost of switching.
“Getting out of your loss-making super fund and chasing the best-performing alternative is often a recipe for losing even more money,” Boal said. “Investors can change super funds, but whether they ought to do so is a very different question. Sometimes the wisest thing is not to do anything.”
Boal said that a typical balanced growth super option earned an average of about 10.3 per cent a year over the past 20 years, compared to a conservative option earning about 8.7 per cent a year.
“But in that 20-year period, there were seven individual years where the conservative option outperformed the growth option,” he said. “If a member had switched their account balance to the better-performing option from the previous year, then they would have ended up switching 10 times and successfully wiped off about 0.7 per cent a year in performance.”
1 July 2008
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