Keeping language simple a super idea

SIMPLER warnings and a wider choice of funds are some of the ideas in the latest review of Australia's super sector.

Plain language labels that describe a fund's risk level would help people understand their investment choices / File

SIMPLER warnings, a wider choice of default funds and user-pays switching costs are some of the recommendations in the latest review of Australia's $1 trillion superannuation sector.

Plain language labels that describe a fund or product as high, medium or low risk would help more people understand their investment choices, the Association of Superannuation Funds of Australia says. The terms currently used by fund managers also need a plain English makeover, ASFA says.

Words such as growth, balanced, conservative or defensive confuse many and do not spell out the risk level involved in each type of fund.

Many funds have different asset allocations despite using the same description.

For example, a balanced fund can range from between 40 to 80 per cent of its money invested in the high-risk share market as there is no industry-wide ruling on descriptions.

ASFA chief executive Pauline Vamos (pictured) is calling for plain labels and standard definitions for all super funds and products, including labels such as "very high risk" and "very low risk" for each product.

The Institute of Chartered Accountants has called for a user-pays system when people switch their investment choice.

The fallout costs of switching and rollovers are often absorbed by the fund and its remaining members, it says.

"One of the difficulties of a range of investment options is the cost incurred in allowing members to switch between each option," says Liz Westover, head of superannuation.

The institute supports people changing their investment option as often as they wish, but says the costs need to be contained.

"One of the lessons that the global economic downturn has highlighted is that you can't have a huge bucket of illiquid, unlisted assets in a single option unless the horizon of the investors is so long that it is feasible to do," Westover says.

Infrastructure assets, in particular, are not able to be traded to match the number of people switching in or out of this type of investment, she says.

Most super members are not currently charged for switching their investment option or for rolling out of a fund. However, the remaining members of the fund must carry the extra administration cost.

According to the ASFA, the average administration cost of switching investment options is between $20 and $50 for each switch.

There is also the cost of buying or selling the various assets to ensure the fund can match the movement of members from one risk profile to another.