With less than a month until choice, employers and fund members need to move on from thinking about what they should do regarding choice of fund and commence execution of some important decisions.
For employers, the key decision in the next few weeks is to formally lock in a default fund.
That decision should include an assessment of whether the employer’s preferred default fund is competitive.
For example, Mercer has developed a ‘Choice Health Check’ to help employers assess how competitive their preferred default fund is, based on an assessment of six key areas:
* investment options and performance;
* contribution flexibility;
* insurance;
* member services and communication;
* fees and charges; and
* miscellaneous issues.
But a decision to stay with a preferred default fund or provider is not the end of the story. Employers should also assess whether there are extra benefits and features that members would prefer to receive from their current fund. This could dramatically improve the competitiveness of their preferred default fund.
Mercer research shows the key features of a competitive default fund in the eyes of members include a suitable suite of investment choices across the risk/return spectrum, including:
* the ability to construct their own asset allocation profile;
* scalable insurance choices for death and total permanent disablement;
* contribution flexibility;
* the ability to open a spouse account;
* the availability of post-retirement income streams; and
* acceptance of binding death benefit nominations.
A second major decision for employers is how to deal with the disbursement of contributions to a multitude of super funds.
Relying on existing payroll software for finance and processing the required data for super choice could be a costly error.
Instead, employers should seek to partner with a clearing house so that contributions for members can be efficiently dispersed to the relevant funds with minimal administrative impact on the employer. Clearing houses are generally linked to a particular default fund provider, so these two decisions probably need to be made concurrently.
The third big decision for employers relates to insurance.
Some employers will feel obligated to provide a minimum level of insurance to their staff beyond that proposed by legislation, regardless of whether employees remain in the chosen default fund or not.
An insurance safety net can be achieved outside the super fund, in the same way as salary continuance insurance is now commonly provided.
For employees, there is really only one major decision to be made in the next couple of weeks: Should I stay or should I go? (with apologies to ‘The Clash’).
Mercer’s Benefits Outside the Square survey showed that 73 per cent of members were unlikely to switch super funds in the next two years — with most being very unlikely. Only 10 per cent of members were “early changers”, rating themselves very likely to switch funds in the next two years, and a further 14 per cent were “followers”, saying they were somewhat likely to switch in the same time period.
The members who were most likely to switch were men with higher account balances (more than $100,000) with multiple super accounts, who were dissatisfied with their current fund.
Death and disability insurance cover should be a major consideration for those members who are considering switching.
Most employer-sponsored super funds offer higher insurance cover at a lower rate with no medical assessment required. Members who opt out of these funds may never be able to obtain the same insurance terms again, especially if they are in poor health.
A recent Investment andFinancial Services Association (IFSA) press release warned that insurance cover was a much bigger issue for super fund members than previously thought.
The research by Chant West Financial Services on behalf of IFSA found that premiums can be up to 22 times greater in one fund compared with another, and that some members were entitled to more than half a million dollars more life insurance — without medical evidence — in their existing fund.
IFSA has also found the average Australian household has a home loan debt of $217,000 and additional credit card debt of $14,000. When you add this to the average $224,000 cost of raising one child to age 20 and the fact that about 4,000 Australians with dependent children under age 21 die each year, insurance is rightly a big issue for members.
Potential switchers also need to consider the real cost of switching.
The typical benefit payment fee for leaving a super fund is usually between $50 to $150. On top of that, the new fund will usually deduct a percentage of the amount invested to reflect the cost of buying the underlying investments. This is commonly referred to as the buy/sell spread.
The buy/sell spread on a diversified growth portfolio is typically 1 per cent of the amount invested.
A third decision for fund members is whether to seek professional advice on what to do.
Mercer research shows that without education and guidance, only one in five fund members are confident about making decisions relating to super.
Members’ super is complicated, so it is at least worth using some of the website tools such as those provided by Mercer and IFSA. And for some people, a visit to a qualified and professional financial adviser is recommended.
Those who decide to stay with their current fund should also look at whether there are benefits and options offered that they haven’t yet explored. For example:
* can you open an account for your spouse;
* attend a seminar on making investment decisions; or
* gain access to other discounted financial services such as home loans or home and contents insurance.
Although super choice is only a few weeks away, it is not like throwing a switch and that’s the end of it. From that date, funds will have to be even more competitive in doing everything possible to hold on to their members.
July 1 is a starting point, not the finishing line and so it presents many opportunities for both members and super funds.
David Anderson is National Business leader for Mercer Wealth Solutions
