Super members don’t need 41,000 investment options

There are too many investment options in superannuation and members do not need nor want to much choice, according to Rice Warner.

The research house’s latest analysis said that as of 30 June 2016, Australian superannuants had access to over 41,000 investment options. This has stemmed from the aim to give members the ability to tailor their asset strategy and provide the means to effect niche investment preferences.

Rice Warner noted that many members were disengaged but many more might be content to belong to a fund which gave a five per cent real return over 25 years.

“This begs the question; do the consumers of the superannuation sector need or even want this choice? Rice Warner’s Super Insights database suggests the answer may be no,” the analysis said.

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It said 85 per cent of industry fund members did not elect an investment choice, and of the remaining 15 per cent the clear majority were invested in one of four pre-mixed options.

It found that the concentration of investments across a small number of options was true even in the retail fund sector, where choice and financial advice was more prevalent.

“As a result, it stands to reason that even members who are acting on complex tailored advice are largely serviced by a small handful of investment options,” Rice Warner said.

“Overall this suggests that even in a high choice environment, members do not utilise the full suite of choices which are made available.”

Rice Warner also noted that funds should consider scaling back the number of options available and said a revised menu could be designed to provide:

• A sensible default for all members more than five years from retirement;
• A tailored default for those transitioning into retirement or on pension;
• Premixed options with suitable growth profiles (say five);
• A small set of sector-based options (say five); and
• Niche options like socially responsible investments (SRI), Indexed strategies or member direct investments (MDI) chosen to suit fund membership (recognising that the small take-up rates will require a cross-subsidy from other members).

It said this smaller subset would allow members to customise their asset allocations or replicate strategies without overwhelming them with too many choices.

“In the context of an industry focused on member engagement and a regulator aiming to shut down inefficient funds, it is timely for funds to rethink their investment strategies and to provide solutions (investment menus) that are better tailored to member needs and behaviours,” it said.