Superannuation confusion a problem for "choice of fund" as members switch funds in 2006

"Although Choice of Fund has only been available nationally since July last year, and as a consequence little definitive experience is available, it will become a major issue as more and more people change employers in 2006" according to Mr Chris Butler, Managing Director of independent superannuation consultancy, The Heron Partnership.

According to published research from ANOP about 7 per cent of people have switched funds, which is in accordance with industry forecasts prior to the introduction of "Choice".

However, according to Mr Butler "Our anecdotal evidence is that in some cases up to 20% - 25% of new employees that would have otherwise joined their employer's default fund, prior to the introduction of "choice", are deciding not to, and in many case people are seemingly making the wrong decision. This means that numerous Australians could have already chosen the "wrong" superannuation product to fund their retirement income".

Mr Butler said "In years to come you will find that the proportion of people not joining their employers fund upon commencement of employment will increase significantly, as they will elect to keep the superannuation product they already have. Not only could this adversely impact the individual concerned it could also result in the "buying power" of the employers fund being significantly reduced, resulting in higher fees for that fund as well as higher insurance costs and lower automatic acceptance limits."

"Making good choices depends on the quality of the comparative information available and in many instances even with professional advisers the quality of this information is under question," Mr Butler said. "We say that the devil is in the detail but too many investors are not receiving detailed analysis of choices."

Mr Butler went on to say, "Most people need to seek advice to help them decide between the company fund or to continue with an existing product or effect a personal plan. Most of that advice should come through a competent financial planner as most people don't have the skills to do it themselves or the time to analyse Product Disclosure Statements. At the same time financial planners also need support to ensure their advice is independent and constructive".

Mr Butler said "Although "ratings" are subjective judgments by the rating agency concerned, they are an important tool, particularly if they allow the individual accessing them to "weight" the key components of the products concerned, based on their own circumstances and requirements."

Mr Butler pointed out a fund rating in itself is not the end of the assessment process as fees and charges also need to be considered as part of the equation, "Ratings reflect the quality and features of a product and when combined with the actual fees and charges that will apply, an overall assessment of "value for money" can be determined. However, it is important to remember that those that rate the highest on quality and features often have higher fees than those that do not rate as well and therefore may not produce as high a retirement benefit. Combining product ratings with financial advice is therefore important in the process of selecting an appropriate superannuation product."

The Heron Partnership recently launched Heron Advisor, part of which enables the financial planner to compare close to 150 features of the leading master trusts and industry funds against the default company fund. These features are grouped under 5 Areas of Importance, which can be "weighted" based on the individual's requirements. This is a detailed analysis of the key components of the funds and enables "side by side" comparisons to be undertaken on-line. Heron Advisor currently includes the assessment of about 100 funds and more are being added.

"This level of detail enables financial planners to provide a detailed analysis very efficiently as the Heron Advisor service is internet based and updated on a continuous basis. In addition, the system enables a financial planner to illustrate projected benefits based on their clients individual circumstances and the fees and charges that actually apply to both the employer's default fund and an alternative plan" Mr. Butler stated.

In addition, members of participating employer funds or new employees considering joining their new employers default fund can access Heron Advisor to view the assessment and rating of the default fund against other funds they may be considering.

The level of interest in Heron Advisor has been very good with a number of individual planners as well as dealer groups already utilising the system. Since its introduction in September this year, there has been over 55,000 page hits on the Heron Advisor website.

Product Disclosure Statements (PDS's) were introduced as the principal source of information, however, Mr Butler sated "Notwithstanding our expertise in this area, we find many PDS's are confusing if not misleading. If information is confusing to us, can you imagine how confusing it must be to members? In respect to fees there is no consistency. Sometimes GST is included and on other occasions it is not, yet on many occasions it is not readily clear if the fee includes GST or not."

"Also in many PDS's advisor fees are confusing. They are usually doubled up (sometimes only partially, to add to the confusion) in the fees paid by members section and also in the section referred to as Advisor Remuneration or Additional Explanation of Fees and Costs. The double up areas would not be clear to the average reader. In addition, some advisor fees are incorporated within the administration fee or the plan management fee, whilst others are payable as an extra. The fee paid by the member is often not easily co-related to the fee paid to the adviser. There needs to better consistency in the way this information is provided in PDS's."

Another source of information is the product issuers call centre; however, Mr Butler believes improvements are also required in this area. "Many hide behind privacy as a reason not to give information - even general product information. Some have recently quoted out of date investment management fees, and only when asked if they have recently changed, was the response "oh, yes" and a revised fee provided. Without the additional prompt a wrong fee would be quoted. Confusion in regard to fees published and the impact of GST and RITC and adviser remunerations is of significant concern as many are leaving callers without answers."