The stream of misconduct revelations emanating from the banking royal commission shows how little successive governments and regulators have done over the years to protect superannuation investors. It has brought the benefits of compulsory super under scrutiny because of fund rip-offs, unwanted insurance coverage and inadequate controls to ensure employers make their mandatory contributions.
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It’s easy to understand why many, particularly younger people, take little interest in their super fund and end up with multiple funds. Long gone are the days when super balances could be cashed out at low tax rates on changing jobs.
The cost of compulsory super also affects the ability of employees to boost take-home pay and increases the attractions of cash economy transactions. Compared with the tangible benefits of paying off a house mortgage, building up the balance in a super fund untouchable till at least age 60 has little immediate appeal.
Successive governments have been slow and often reluctant to deal with the high costs of sales incentives and poor product design. Until John Dawkins acted in the 1990s to force companies to reveal fees and charges, customers were easy prey for sales agents. More than 20 years later, the royal commission is uncovering the dealer abuses of legacy products from that time because all governments have preferred to change the rules only for new products.
My 1992 book, 68 Super Strategies, included an appendix containing a letter fund members could send to their agents to help them assess whether they’d been robbed. Reader feedback revealed many instances where fund members had been unaware of the high costs of their funds. Some of these products are still in existence today with legislation protecting only new clients.
Hopefully, the royal commission report will force regulators and government to focus on protecting those who still invest in legacy products. Until then, investors including those with small accounts should inquire into the cost structures and potential and actual returns of their funds.
An easy way to start is to determine the transfer value to another fund. This can be compared with the amount contributed and where it’s substantially less than the stated account balance there’s cause for concern. The government does have plans to limit exit fees to a maximum of 3 per cent but it’s uncertain what super funds the legislation will cover.
Employees have no option but to receive the compulsory super contributions made by employers. However, there’s no compulsion to make voluntary personal or self-employed super contributions. In both these situations it’s crucial to ensure that the fund used offers tangible long-term benefits.
While the odds of being ripped off have diminished greatly, there are still traps for the unwary to be avoided.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
