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Super investment menus could be too complex
The recent legislation changes to investment menu designs could lead to unnecessarily complex menus for the majority of superannuation fund members, according to Rice Warner.
In an analysis the research house pointed to the recent Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 passed in April 2019 and said this led to a wave of funds undertaking formal reviews on their investment strategies.
In terms of superannuation funds, Rice Warner said a lot of funds had benefitted from a simplified investment menu with most of their assets invested in default MySuper which could lead to lower investing costs.
However, Rice Warner said some products that currently occupied a middle ground might not be satisfying the future needs of members.
“These products provide a larger and more comprehensive investment menu designed to meet the investment needs of a wider variety of members but fall short of the range and flexibility of a platform offering the full spectrum of investment choice,” it said.
It warned that investment menus may have become unnecessarily complex for the needs of the majority of super fund members and potential problems that could arise were:
- Smaller pools of investable assets, which may compromise scale benefits and can potentially increase investment management costs; and
- Too much choice can make it harder for members to discern between the investment options, which can lead to confusion and uncertainty and increases the risk that members make sub-optimal decisions.
Rice Warner noted that some funds chose to offer simple investment menus to serve the majority of their members and also had a broader menu on another platform to accommodate the needs of more financially sophisticated members.
It said this would allow the broader group to benefit from retained scale in investments while addressing the needs of more financially sophisticated members.
In terms of best practice Rice Warner said funds needed to assess whether a member was able to construct an investment portfolio to suit their own risk profile and preference and this should comprise of:
- For those members who choose to not make a choice or who are simply not engaged, a well-constructed default option that takes into account the varying needs of different cohorts of members; and
- For those members who are engaged and want to make an investment choice, a range of multi-sector and single-sector investments that the member can use individually or in combination to construct a suitable investment portfolio, or shape one to better suit their needs.
The research house also said best practice in investment menus involved:
- Simplicity by providing options that are clear in terms of their risk profile and that are distinct relative to the other options available. This may include removing less distinct options that may cause confusion to members;
- Access to scale benefits such as lower fees and sophisticated investments that would not usually be available; and
- Tax effectiveness through investment options which are well constructed and have mechanisms to allow a member to transition to a pension product without incurring significant additional cost.
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