There are some things about the way our super system works that, quite frankly, stink. Here's how to tell if your super fund is "on the nose" and what you can do about it.
The Australian Securities and Investments Commission (ASIC) has finally decided it is going to take steps to make super funds tell their members exactly where their hard-earned retirement savings are invested.
Yep, that's right. The current state of play is that Australian super funds legally don't have to tell their members exactly what shares or managed funds or other assets they invest your money in. Now that stinks.
The Super Guarantee is a compulsory savings scheme that forces all employees to commit 9% of their gross salary to a retirement savings plan. As a result of its compulsory nature, and the fact it comes out of your pay packet before you even see it, there are certain characteristics of our current super system that are really on the nose.
Here's the Your Money Magazine Top 5 list of what's wrong with Australian super funds and some tips about what you can do if you think your super fund is a bit whiffy.
1. It's compulsory
That will be good news as you're approaching retirement and start reaping the benefits but in the 40 or more years leading up to retirement, there are times when your super savings could, arguably, be put to better use. Withdrawing money from your super to use as a deposit on your first home is one commonly-cited example.
Solution: there are hardship provisions that do allow you to access your super early if you are in genuine financial hardship but otherwise we're stuck with a compulsory retirement savings regime.
2. It's distant
Employer contributions to superannuation come out of your gross pay. you don't have to think very much about the whole process and as a result most people feel quite detached from their super. This explains why Australians have an average of three super accounts, lost super and settle for high fees and poor returns.
Solution: take ownership of your super. Read annual reports and account statements. Make sure your employer is making the correct contributions. Ask questions of your fund if you are not happy or don't understand something. If you think your current fund represents poor value for money, exercise your right to change funds or start a self-managed super fund. If you have more than one fund or you've lost track of any super funds, consolidate now and stop paying unnecessary fees.
3. It lacks accountability
Levels of "disclosure" vary drastically between funds. Some super funds do provide their members with comprehensive information about exactly where their savings are invested, Others fall way short in this department. The growth of the super industry over the past 20 years means super funds have morphed into major and powerful financial institutions. As a result their levels of customer service and accountability are not always up to scratch.
Solution: engage your fund. Take advantage of its full range of member services and information. Tap in to online information. Find out if your fund runs free seminars, make sure you're receiving any newsletters or other regular information. Take advantage of your fund's phone-based and online customer service facilities to ask any questions you have about your account or the way the fund is run. Keep asking questions and if you're dissatisfied with the answers, perhaps it's time to consider changing to a better fund.
4. It's not guaranteed
One of the biggest contradictions about our super system is that even though it's compulsory, your savings are not guaranteed. Super funds lose money for their members regularly. A substantial proportion of Australia's collective pool of superannuation savings is currently invested in our very small local share market. the 2010-11 financial year was a strong one for many super funds but the first half of 2011-12 has been a bloodbath for many funds.
Solution: understand the level of risk you are currently taking with your super savings. Most members are in their fund's 'default' investment option, which can have up to 60% or more of your account invested in volatile asset types like shares. Most funds have safer but less popular investment optioms such as fixed interest and cash. Many now offer term deposits. Make sure your super investments match your personal risk profile and your life stage. Ask your fund for guidance about this or seek independent advice
5. It represents poor value for money
Many Australians are in super funds that charge high fees, even during years when they make mediocre or poor returns. There is an opportunity cost here as you could potentially make more money if you had a greater level of control over how your retirement savings are invested.
Solution: if you are in a high-fee fund, consider switching to a low-fee fund. The other way to take control of the costs of your retirement savings is to start your own self-managed super fund. If you have the time and investment experience you can manage the investment strategy and potentially reduce your ongoing costs substantially while knowing exactly where your money is invested.
-- By Jackie Pearson