John Collett
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A NEW type of superannuation investment option promises to give the fund member a smooth "glide path" where the risk is dialled-down as they age.
These are called lifestage options, but are also called lifecycle options.
The options will often have names that are reflective of the super members' birth decades – 1960s, 1970s, 1980s. For example, all those born in the 1970s will be in the super fund's 1970s lifestage option and so on.
At certain time intervals, such as each 12 months, the investment risk is reduced by the super fund automatically without the fund member having to do anything. That's achieved by reducing exposure to "growth" investments like shares and property and increasing investment in "defensive" assets that pay income, such as fixed interest and cash.
Lifestage options are designed to address the problem of older fund members not having enough time to recover from a sharemarket crash.
In Australia, it is retail funds, such as those run by the banks, that have most fully embraced the concept.
Many fund members have been put into lifestage options by their retail funds without them electing those options.
That's because many retail funds have nominated their lifestage options as their "default" investment options for those members who do not choose an investment option.
Not-for-profit Industry funds have retained their traditional 70/30 investment options as their default options, but more are adding lifestage options for members who want to choose them.
The 70/30 options are where 70 per cent of the money is invested in growth assets and 30 per cent in defensive assets.
This split is considered to give the best returns for an investment risk that is acceptable to the vast majority of super fund members.
I suspect that one of the reasons retail funds have embraced lifestage options is because of the industry funds' "compare the pair" advertising campaign.
This is where the typical performance of the industry funds' 70/30 investment options is put up against the typical retail 70/30 option. Retail 70/30 options come off second best.
As each super fund's lifestage option steps the asset allocation by differing degrees, they are impossible for ordinary fund members to compare.
The researchers themselves are grappling with how to compare them and, as most of the lifestage options are new, there are no lengthy performance track records.
All large super funds have a range of balanced options with differing mixes of growth and defensive assets.
They have labels such as "conservative" balanced where the mix is 50/50 and "stable" where the mix is perhaps 70 per cent defensive and 30 per cent growth.
The mainstream 70/30 option is likely to remain the best fit for most people until at least age 50 or even older. They are simple and easy to understand.
Most older fund members who want to protect themselves from market crashes can always elect to step-down the risk as they age by switching between their funds' balanced options.
That way they can keep it simple and transparent.
Sydney Morning Herald
