As such, investment funds need to “rethink their investment strategies” and focus on providing solutions that are “better tailored to member needs and behaviours”, financial consultant, Rice Warner has said.
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”.
The financial consultant said that while the trend of funds providing more options to superannuants is “multifaceted, it largely stems from an aim to give members the ability to tailor their asset strategy and provide the means to effect niche investment preferences”.
In its argument, however, Rice Warner referred to research from the Pension Research Council in America which found that over a 20-year investment horizon, funds that “provide an excessive number of investment choices reduce member value by nearly $10,000”.
Commenting on that finding, Rice Warner said: “Many members are disengaged but many more might just be content to belong to a fund which has given a 5 per cent real return over 25 years.”
“This begs the question; do the consumers of the superannuation sector need or even want this choice?”
Pointing to its own research database, Rice Warner said the answer “may be no”.
The Rice Warner database contains individualised member records for more than 14.8 million distinct accounts and shows that a “staggering” 85 per cent of industry fund members do not select an investment option.
Further, in the remaining 15 per cent, the “clear majority are invested in one of four pre-mixed options”.
These are growth (the most popular over all age groups), high growth, balanced or conservative.
“This concentration of investments across a small number of options is true even in the retail fund sector (where choice and financial advice are more prevalent),” Rice Warner contended.
“In this scenario, 30 of the options on offer across all funds account for 75 of all investments.
It continued: “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.”
As fund members aren’t using the full suite of offerings, Rice Warner suggested funds “consider scaling back the number of options available”. This would also “assist member decision making” and remove the risk of “the paralysis that accompanies too much choice”.
Rice Warner proposed funds provide a “sensible” default option for members with more than five years until retirement and tailored default options for those who are transitioning into retirement, or those who are on a pension.
Further, funds should consider providing around five “premixed” options with appropriate profiles and another five with sector-based options.
Finally, funds should also think about providing “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)”, Rice Warner proposed.
“This smaller subset would allow members to customise their asset allocations or replicate strategies without overwhelming them with too many choices,” Rice Warner explained.
“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.”