Last month, I wrote about phase three of super choice — learning about choice and the options available. Now it’s time for phase four, when employers and members must make some challenging decisions.
For employers, one of the biggest decisions is nominating a default fund.
In many cases, this will mean staying with the same provider, but even that decision requires some work. Employers must satisfy themselves that their existing provider is ‘competitive’.
The key to making the right decision about a competitive default fund is to really understand what features and benefits are important for their employees. Employers need to ensure that their fund has the right mix of features across a range of areas including investment options and performance, contribution flexibility, insurance, member services, fees and charges. The MercerChoice Health Check helps employers with this assessment (see http://www.mercerhr.com. au/choiceoffund ).
Attention should also be given to benefit design to ensure competitiveness. In a choice environment, employees are likely to seek greater flexibility with their benefits. For example, a defined benefit fund requiring a member contribution may not suit someone with a large mortgage. A fund with lower mandatory contributions may be a better option. Similarly, a fund offering a choice of insurance cover is likely to better meet the needs of more members than a fund that does not.
Employers also need to think about whether they need to offer different default funds to different types of employees.
For example, the default fund for lower income employees may be a low cost, simple fund, while managers and executives may be better served by a fund with a greater breadth of member services, investment options and ancillary services — accepting this is likely to cost a little more.
A second major decision for employers is how to deal with the disbursement of contributions to a multitude of super funds.
Many employers are planning to rely on their existing payroll software and many will find it inadequate in coping with multiple super funds.
Instead, employers need to decide which clearing house to partner with so that members’ contributions can be efficiently dispersed to the relevant funds. The clearing houses are generally linked to a particular default fund, so these two decisions will likely need to be made in tandem.
A third important area for employers to focus on is insurance.
Does the employer feel obliged to offer basic insurance, to avoid problems if an employee dies in service without cover?
For example, if the default fund offers a payment of four times salary if an employee dies, but a new employee chooses a different fund and does not take out insurance, does the employer feel financially or morally obligated if the employee leaves a widow and children insufficiently covered?
The employer’s sense of responsibility towards its employees will also affect another decision: how much help do employees need to make the right decisions about super choice?
Mercer research shows that four in five people do not feel equipped to make informed decisions about super choice. However, after educational seminars seven in 10 are confident about making an informed decision about their super.
The research also revealed that employees are looking for assistance with financial decision making and are prepared to share the cost of obtaining access to employee benefits such as financial advice.
Overall, change for the sake of it is not a good decision. Many employees are already in well-run funds that have benefited from the employer’s substantial research, negotiation and group purchasing power.
Mercer’s Benefits Outside the Square survey showed that 73 per cent of members were unlikely to switch super funds in the next two years — with most being very unlikely. Only 10 per cent of members were “early changers”, very likely to switch funds in the next two years, and a further 14 per cent were “followers”, saying they were somewhat likely to switch.
The members who were most likely to switch were men, those with higher account balances (32 per cent with more than $100,000) who had multiple super accounts and were dissatisfied with their current arrangements.
Employers and providers will need to support employees with their super choice decision making. Like employers, employees will need to carefully consider their funds features and specific issues such as insurance provision. They may need assistance when considering important and high-profile features such as fees and investment returns — and balancing these features with others available through the fund.
So, phase four of super choice represents a time for challenging decisions by employers and employees alike. Even the status quo requires careful thought and consideration by both parties.
* Next month: Phase five — executing decisions on choice
David Anderson is National Business Leader for Mercer Wealth Solutions
