‘Mankind have a great aversion to intellectual labor; but even supposing knowledge to be easily attainable, more people would be content to be ignorant than would take even a little trouble to acquire it.’
Samuel Johnson (1709–1784), from The Life of Samuel Johnson
Two headlines jumped out at me in recent weeks. Both are concerning taken on their own. But when you read them together, they’re actually quite alarming.
The first headline came from a University of Melbourne study published in The Age: ‘Study finds lack of knowledge and interest in superannuation among young.’
University of Melbourne Law School Professor Ian Ramsay spearheaded the study. The article goes on to say:
‘Knowledge of basic facts about superannuation is low among young adults aged 25-34 years old… The study surveyed nearly 1000 superannuation fund members in the age group… It also found that young adults are largely unengaged by and uninterested in superannuation or retirement planning… The findings showed that knowledge of basic facts about superannuation is low, particularly in relation to age of access to superannuation and the definition of investment options… Only one third read their periodic statements. A very small number planned for retirement.’
Ian added that, ‘Only one in five of the respondents said they trusted the superannuation industry.’
There are a few important issues here.
First, 25–34 year-olds are unsure of when they will gain access to their superannuation savings. This is also known as the preservation age, because government rules generously ‘preserve’ your money until then.
Their uncertainty in this case is understandable. It has nothing to do with a lack of interest or knowledge. At 45 I’m a good bit older than the survey group. And I certainly don’t fall into the uninterested or unengaged category when it comes to super. But even now, more than 20 years into my professional career, I can’t be sure when I will be able to access my superannuation.
Why? Because just as the pension age is going up to 67 before climbing to 70, so too is the age at which you’ll be allowed access to your super.
Under today’s rules, if you were born before 1959, you can access your super when you turn 55. If you were born after 1964 you can’t get your money until you turn 60.
And, also like the pension age, that’s almost certain to rise to 65. This government has already proposed that in order to maintain the five year gap between the pension age — rising to 70 — and the preservation age.
If the government can move the goal posts now, who’s to say they won’t shift them again? With that in mind, I would hesitate to place any more money into my super fund than the law mandates. I know the government offers some appealing tax advantages to ‘salary sacrifice’…putting extra money into super. But the word ‘sacrifice’ alone should make you wary.
And we’ll forgive the young’uns their doubts on this count.
Share your knowledge
What’s more concerning is the respondents’ lack of knowledge on investment options and their failure to plan for retirement.
The Albert Park Investors Guild is all about knowledge. Investing in your own knowledge and tapping into the combined knowledge of your network is the cornerstone to success. As I’ve written before that, to be a better investor, you must invest in your own knowledge first.
Most Daily Reckoning readers probably don’t fall into the 25–34 year old age group the University of Melbourne surveyed. In fact, many of you likely have children that age. Or will soon. And judging by the survey results, you’ll need to be proactive in teaching them to put them ahead. Their peers appear to be ill prepared for their own financial future.
I suspect a lot of people will throw up their hands and say, ‘Well, that’s kids for you.’
But rather than meekly accepting the current situation, you and I can share our knowledge. Because, as Samuel Johnson pointed out more than two centuries ago, ‘Even supposing knowledge to be easily attainable, more people would be content to be ignorant than would take even a little trouble to acquire it.’
I remember enough about my 25th year to know it was very tempting to choose the easy road of contented ignorance. Sometimes you need a friendly nudge in the right direction.
If you are serious about setting your children up with the financial education they need, Vern Gowdie, the Guild’s Superannuation and Family Wealth Analyst, is the man to turn to.
He’s written extensively on the lifelong mentoring process he’s undertaken with his own daughters. His primary goal is creating true generational wealth.
Trust is something you earn
Rounding off my concerns about the recent Melbourne study is this: ‘Only one in five of the respondents said they trusted the superannuation industry.’
That’s deplorable. A 20% trust level? I imagine Russian President Vladimir Putin enjoys better figures than that in Chechnya.
The second concerning headline I ran across may shed some light on this extreme level of distrust. This one appeared in Business Day: The secret fund managers still won’t disclose: how much they are paid.
The article went on to say:
‘In the age of full corporate disclosure, there is one sector still living in the dark ages… Fund managers are a key cog in the machine that disperses Australia’s much-celebrated superannuation pile, which is headed towards $2 trillion. Fund management is not only about superannuation but retirement savings are easily the biggest part of the nation’s total $2.3 trillion fund management industry. Based on current contribution rates and labour force trends, super’s representation will swell to $3 trillion by 2020…
‘When a super fund member makes a contribution to their retirement balance, part of it is deployed by the super fund into the hands of fund managers, who invest the money into shares, bonds or other kinds of securities. It is a good business to be in, with $20 billion of new money flowing in every year courtesy of compulsory superannuation…
‘The true extent of the rewards on offer is unknown… And when things do not go to plan, there is no evidence of clawbacks in the event of client losses.’
David Whiteley from Industry Super Australia said, ‘In requiring 9.5 per cent of people’s wages to go into this super system, it’s actually somewhat odd that someone can’t get the information they want about how the fees they’re paying are being spent.’
‘Somewhat odd’ is putting it politely, but David is on the right track here.
Though not according to Andrew Bragg, Director of Policy of the Financial Services Council (FSC). He stated, ‘What’s most important to a member is the total fee they pay. If a super fund is paying $5 or $5 million to a fund manager, it’s immaterial [to the member]. What matters is net returns. At the end of the day we’re here to provide retirement income for people.’
Excuse me while I catch my breath.
Is it just me, or would you agree that it most certainly is not immaterial whether your fund manager is paid $5 or $5 million? Andrew mentions net returns, which of course is the bottom line for investors. But he ignores a few important points.
First, over the last five years the majority of fund managers underperformed individuals who chose to passively — and relatively cheaply — invest in index funds. Perhaps those fund managers are the ones earning $5, Andrew?
What he also ignores is this: if your superfund is paying your fund manager $5 million, that’s $5 million less in net returns.
We’re not big fans of the fund management business here at the Guild. That’s not to say there aren’t some perfectly honest and capable fund managers out there. But the industry as a whole is, well, rather parasitic.
Now I’m not suggesting fund managers work for free. But if they are earning $5 million off of your hard earned money, they should at least have the backbone to disclose this fact. And then you can decide if they’re worth it. Particularly as there is no evidence of any fee clawbacks in the event of losses.
Maybe then the superannuation industry will find that more than one in five young adults has any faith or trust in their system.
Chairman, Albert Park Investors Guild
Editor’s Note: This is an edited excerpt of an article from the Albert Park Investors Guild.