Super has ‘too many’ investment options: APRA

By Lucy Dean

November 29 2017
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The superannuation industry of the future may be “stronger, more sustainable [and] more resilient”, but too many choices can still trigger a “headache”, the industry watchdog has warned.

Speaking at the Association of Superannuation Funds Australia (ASFA) conference today, the deputy chairman at the Australian Prudential Regulation Authority said the number and nature of super funds’ investment options “warrants consideration” when it comes to assessing member outcomes.

Helen Rowell explained: “It’s generally smaller funds that offer more options per 100 member accounts.

“When looking at this data, the obvious question it raises is whether those smaller RSEs offering a large number of options for their membership have the capacity and resources to properly manage this degree of investment complexity.”

An RSE, or registrable superannuation entity, is either a regulated superannuation fund, approved deposit fund or pooled superannuation trust. RSEs do not include SMSFs.

Ms Rowell argued that the fact that there are 41,000 investment options spread over 209 funds is “astonishing”.

“That’s an average of 196 investment options per fund.”

She said that, from a member’s perspective, the question that needs to be posed is: at what point does too much choice becomes a “headache”, rather than a benefit?

“It seems legitimate to ask why the industry offers members an average of nearly 200 investment options when many funds have a significant proportion of members in their default MySuper products and hence relatively few members in each of the many choice investment options on offer.

“And that is particularly the case when many of the options don’t appear to be markedly different in their asset allocation or risk/return characteristics.”

Acknowledging that this isn’t the first time she’s argued that there are “too many” options, she said the research backs her up.

According to a 2015 study from the University of Pennsylvania, over a 20-year investment period, funds that provide an “excessive” number of options tended to reduce member value by the “not unsubstantial” sum of $10,000.

Ms Rowell commented: “Given the average fund balance for the industry is $55,777… [this is] certainly not in the best interests of those fund members.”

“Under APRA’s proposed member outcomes assessment, and as part of sound strategic and business planning, we would expect trustees to seriously consider the optimal number of investment options they should be providing to efficiently deliver quality outcomes for members.

“Might the time and fees dedicated to administering so many options, many of which appear to be very similar, be better directed elsewhere? In particular, might members be better off with a smaller number of options delivering appropriate risk/return outcomes and a reduction in both fees and fund administration costs? I suspect, in many instances, the answer to both questions is yes.”

Analysis by financial consultant Rice Warner in October also found that “excessive” choices can reduce member value by nearly $10,000.

Noting that the number of investment options open to superannuants has nearly tripled in the decade to 30 June 2016, in spite of the number of actual funds in the market halving, Rice Warner questioned whether “there is such a thing as too much choice”.

“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.”

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