You can't always get what you want but... You get what you need

A reader wrote

I've read a couple of your older articles on super funds using ETFs. I was interested in your updated thoughts on this topic.
I feel that the Australian government has failed the public interest on this topic, quantifiable at 1-2% p.a. of most people's retirement income.
Surely a firm is offering something like the IRA in the US: virtually no fees, admin/reporting taken care of, invest in anything you want (such as ETFs) and the IRA typically runs off a commission. Anything more than 30 bps p.a. total is preposterous (excl insurance).

Since the focus of this blog is on available products and strategies I will start with that in mind.

In terms of what is currently available, there is no Super product I'm aware of that allows us to "invest in anything you want (such as ETFs)" while remaining that inexpensive. There are funds that allow a limited investment in a limited range of ETFs (e.g. Australian Super, ING Living Super and Hostplus) and cost a minimum of $180 p.a. There are wrap accounts that often allow a wider range of investments but usually cost more than 30bps for the account alone before investment management fees. And there are SMSFs with relatively high fixed fees (minimum $700p.a. before investment management and transaction costs) and/or effort required.

So you can't always get what you want.  But if you try sometime, you just might find.  You get what you need. [Thanks to The Rolling Stones]

I want exactly the same thing.  But I do not think my retirement is imperilled without it.  While we don't have all the flexibility we want, I've documented enough choice at low cost to give us what we need.  For example:

For someone who just wants an all-in-one fund they can add to and forget about during their accumulation, Australian Super Indexed Diversified or Hostplus Indexed Balanced cost 0.21% and 0.04% p.a. respectively (plus $78 in administration fees).  If you want things simple but don't want as aggressive an allocation (70-75% in Shares) both also offer low-cost Fixed Interest and Cash choices which can be used to lower the overall volatility.

For someone like me who wants to customise their broad asset allocation, I use SunSuper Index and Enhanced Index funds to access broad asset classes at a cost of 0.2-0.3% p.a. (plus another $65 in administration fees).  Many allocations could also be achieved using a mix of funds and ETFs with a provider offering direct investment options (e.g. Australian Super, ING Living Super and Hostplus), although I found this to be more expensive and actually less flexible for my desired allocation.

If I were living, working and retiring in the US I would probably take advantage of the offerings from Vanguard or Schwab and go into asset-allocation overload.  But there are no guarantees this would leave me better-off, and it certainly won't leave the average investor better-off - there are only so many micro-cap deep-value stocks to go around and by definition not everyone can overweight a specific market anomaly.  Plus unlike the US, it is much less likely my employer in Australia will put me in a (401k) plan charging > 1% p.a. which I cannot roll-over until I leave the job.

There are many improvements that can improve retiree outcomes.  But while I'd love more investment flexibility for myself, I just don't see that as providing big gains to society.  If anything there is some evidence that, for the average person, having more choice and more flexibility in investment products tends to have individuals make poor choices (such as switching out of shares after a downturn) and lead to worse outcomes.  So what can make a bigger difference in my opinion?  The majority of Australians with superannuation sit in the default allocation of their employer's default superannuation fund.  The biggest gains in "accumulation mode" are in ensuring those default allocations are appropriate (in terms of risk) and are provided at a reasonable cost.  Once in "pension mode" there are probably also gains in the retirement income products that can be offered.  However, with the exception of standard life annuities, this is a somewhat experimental time for such products - it will be interesting to see how they evolve.  And while the current superannuation taxation arrangements have certain advantages for many I care about, they do not seem sustainable within my lifetime or an efficient way to encourage saving and reduce reliance on the age pension.

You might wonder how we have the strangely limited products currently available. For example, most of the direct investment options limit you to 20% in any one holding. This makes sense for a single share but less so for a broad ETF. Part of it is regulation: trustees are required to act in members interests, which includes diversification.  Also, the same 1 or 2 consultancies are used by most of the funds to ensure they meet these requirements with new products.  In protecting themselves legally, most providers end up with a very similar set of rules and ETFs available.

But when it comes to pricing, the key is the limited market for true price-based competition. We have a small population but a large super system. It's actually one of the largest defined-contribution retirement systems in the world - so why isn't there much price competition? Well, the majority of fund members stick with the default asset allocation from one or more of their employers' default funds. So the number of individuals making active choices is not that large a market.  And the number of those who are cost-sensitive is smaller still. So the profit opportunities in providing maximum flexibility to cost-sensitive, not-so-large customers like me aren't likely to be huge (to incentivise private providers; there are relatively reasonable, very flexible options for individuals with very large balances).  And the gains to society by increasing the level of flexibility offered now are unlikely to be large, so government isn't likely to prioritise it except on ideological grounds. It seems likely that improvements will be at best incremental rather than revolutionary.

Those are my thoughts on the issue. What are your thoughts? How are current product offerings not meeting your wants or needs?