Dan Miles: Default super robs millions of young workers of comfy retirement, but there’s something they can do

More than 5.2 million young Australians are missing out on higher superannuation returns by investing their retirement savings in default MySuper accounts and not taking on enough risk by investing more in equities. Their losses could mount to hundreds of thousands of dollars over their working lives. Innova Asset Management has analysed data from the Australian Prudential Regulation Authority covering millions of young workers under the age of 40. The analysis reveals an all-equities portfolio spread across Australian shares and unhedged international shares outperformed the typical MySuper balanced fund by 13.6 percentage points over the decade ending September 1, 2023, and by 16.8 percentage points over the multi-decade period between January 1, 1995 and September 30, 2023. As MySuper didn’t exist in 1995 — it was introduced in 2012 — Innova developed a simulated model and ran it from 1995 to test longer-term outcomes. While an all-equities portfolio posted more volatility than MySuper accounts, this evened out over time. This finding has important implications for wealth generation. Younger investors need to generate more wealth through their superannuation to allow them a comfortable retirement income. While younger investors have the benefit of longer working lives and a rising superannuation guarantee, they will need stronger long-term returns that an all-equities approach will bring. Australians aged under 40 typically face a 25 to 45-year investment time frame before their superannuation is accessible. In short, many can afford to take on higher-risk equities options. The amounts being lost are significant. According to separate research from the Productivity Commission released in 2018, being invested in an underperforming MySuper product could leave a typical new workforce entrant $375,000 — or 36 per cent — worse off by retirement age. Clearly, many younger Australians could be doing a lot better with their superannuation. Innova’s analysis of the APRA data reveals 233,000 people aged 30-34 hold between $100,000 and $499,999 in MySuper accounts. Meanwhile, 597,000 Australians aged 35-39 also have the same amount invested in MySuper accounts. There are currently about 61 MySuper products which are intended as low-cost, simple products suitable for most investors. Most are balanced funds, with a static 70:30 growth-defensive asset portfolio allocation, though a small number are life-cycle funds, in which investors’ exposure to defensive assets increases as they approach retirement age. This highlights that many Australians need financial advice on how to better invest their retirement nest eggs. MySuper products were designed to cater for a largely disengaged customer base given superannuation’s distant pay-off. Those least likely to be engaged — and so invest in default MySuper products — are young people with a lower education, those on lower incomes, and people with lower financial literacy. However, even younger Australians on higher incomes with relatively higher levels of retirement savings remain invested in lower-returning MySuper products. This suggests there is a great opportunity for financial advisers to expand into a younger client base to advise younger Australians on taking on higher equity risk retirement investment options, which are more likely to deliver superior long-term returns. To compare super funds, use the Australian Tax Office’s YourSuper comparison tool. If you find your MySuper product is underperforming, it’s important to get advice on how you could improve your retirement outcomes. Many younger Australians who are, by default, investing in MySuper products would be better off with financial advice. This represents an opportunity for financial advisers to offer more affordable and scaled financial advice to young Australians so they can get the most out of their superannuation. Dan Miles is the managing director and co-chief investment officer at Innova Asset Management