A Study on Employee Factors for Superannuation Contribution Plans

This report delves into the critical factors employees consider when deciding between defined benefit and defined contribution superannuation plans. It highlights the importance of understanding superannuation as a pension program provided by companies for their workers, including the benefits and tax advantages. The report examines key factors influencing employee choices, such as fund performance, cost and fees, investment options, extra benefits, associated risks, and the services offered. It also discusses the time value of money, taxation implications, and opportunity costs. The report emphasizes the need for thorough research, aligning plan choices with individual goals, and understanding the terms and conditions of the chosen fund. The analysis includes insights into different types of funds available, such as MySuper, retail, industry, and corporate funds, each with their own merits and demerits. The report underscores the need for careful consideration and a comprehensive understanding of the available options to maximize the benefits of a superannuation plan.

A STUDY ON
THE FACTORS CONSIDERED BY EMPLOYEES WHEN CHOOSING WHETHER TO
PLACE SUPERANNUATION CONTRIBUTION IN THE DEFINED BENEFIT PLAN
OR INVESTMENT OF CHOICE
Submitted by
NAMAES OF THE CANDIDATES
Registration No.
Subject: Corporate Financial Management
Submission date
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Introduction
The three-quarter of the world working population retire poor or will be working in defiant of
retirement to earn a living. More than half of the employees don't know how much to save for
retirement. Possibly that is why others completely fail to plan or save too little for their future.
The above are some of the reasons why most organizations offer a pension plan or what they call
superannuation for their employees. Superannuation usually referred to as defined -contribution
or defined- benefit plan is therefore described as a pension program by the company for the
benefit of their workers (Agnew, Bateman and Thorp, 2012).
Superannuation requires the potential employer to pay or deposit a certain amount of money into
super account under employees’ name which is then managed by a super fund. Also, the
employee can decide to add top up the contribution into the scheme. For the self-employed,
chooses how much to put into the superannuation (Anderson et al. 2016).
In addition, superannuation does not rely on market performance but depend on the number of
years person employed, salary rate and exact prescribed age of retirement. Upon meeting the
prescribed conditions underprovided by the superannuation fund, the beneficiary is entitled a
fixed amount on a monthly basis.
Compared to other retirement schemes, superannuation offers an exceptional tax benefit to both
contributors and beneficiary. Contribution to approved superannuation is treated as a business
tax-deductible expense. For the beneficiary, either employed or self-employed any contribution
and withdrawal to and from approved superannuation is a tax-free as it is prescribed by the tax
department.
Access to the superannuation benefit is restricted to the early benefit even under the severe
conditions unless otherwise prescribed (Byles, et al. 2013).
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Superannuation benefits fall into three categories in Australia;
 Preserved benefit
 Restricted non preserved benefits and
 Un-restricted non preserved benefits
Preserved benefit- As the name suggests, this benefit can only be accessed if you meet the
conditions of release, for instance, retirement age.
Restricted non preserved benefit- under this benefit, benefits can’t be accessed until the agreed
period lapses. For the employees, it is accessed when the employment contract is terminated.
Un-restricted non preserved benefit – This includes any benefit which may be paid on request or
demand after satisfied super fund conditions such as age and retirement from the employment
contract. Here you can apply for the benefit in a lump sum or a pension. If the application is
made before meeting release conditions, then the payment is subjected to taxation and vice versa.
In India, it is categorized into two
 Defined benefit plan
 Defined contribution plan
Defined benefit plan- under this plan, the benefit derived regardless of contribution is fixed and
it's determined by the employee number of years of service to the company, age, and salary.
Upon meeting the prescribed conditions, the employee receives a fixed amount based on an
existing formula.
Defined contribution plan- under this, the contribution is fixed but the benefit is pre-determined
by the market forces and therefore the beneficiary is not sure of how to receive on retirement.
This mean, the beneficiary or the employee bears all the risk.
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Factors to consider when choosing the superannuation plan
For the maximum benefit from a super fund, you must be very considerate and careful when
choosing (Feng, Gerrans and Clark, 2014). The firm performance history will tell us all. The
following are some of the factors need to be considered when choosing the best super fund;
 Performance
 Cost and Fees
 Risk associated
 Investment option
 Extra benefits
 Services
 Type of super fund
 Insurance
a) Performance
It is how the best the super fund is doing in term of sustainability. When making the choice
decision it is important to compare the firm trend within five years and not less. The performance
analysis may involve the investment strength in regards to the nature of asset, membership,
taxes, and fees when cross comparing. The annual reported income over the period can also help
when making an investment decision. Please note, the huge the assets owned by the super fund
over liability is the clear indicator of the well-performing fund.
In addition, when the super fund has a long historical list of members, with less negative views
and suggestions in terms of services and payout- social economical accounting will be the sign of
a well-performing firm.
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b) Cost and Fees
The fee is an expense to personal income. it reduces the expected receivable amount. Accounts
charges or fee can discourage personal investment and saving and also affect the payout amount.
The different super fund offers different account charges and it is advisable to do across
comparison when choosing a super provider. Also, some providers have the hidden fee which
some of the times are more expensive compared to normal fee and therefore, it is useful to
enquire intensively before the final decision.
So, when choosing the super provider, some of the fees you need to look at is the administration
fee, consultancy fee, insurance fee, investment fee among others. Therefore, it is important to
choose the one with lower charges since the higher the fee will eat away your saving.
c) Investment option
The good super provider should provide a variety of asset portfolio to choice with minimal risk
when making an investment decision. It is important to compare different fund provider with the
same investment opportunities to evaluate the suitable one with the less cost. Also, different
investors have different taste on their investment of choice (Gallery, Newton and Palm, 2011).
Therefore, a variety of investment option gives ground for choosing the appropriate one.
Suitable investment option to choose should have some of the following features;
 Growth option- Possibly to have a higher return in the future with more investment plans
 Risk option- Can diversify risk easily and have higher returns
 Stable cash payout- should have stable cash payout with regular growth
Please note, the type of investment option you choose today will determine the amount
receivable after meeting the prescribed super requirements.
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d) Extra benefits
The flexible super provider is more suitable for the investment especially if it gives room for
private to up. This means, the more the amount you invest the higher the likelihood you will reap
more. Extra benefits may also include free or subsidized consultation fee, free or subsided
insurances, and subsidized services among others. Such a super fund with extra benefit tends to
be suitable and attract more investors. It is important to note, the super fund with long term
benefit is more attractable compared with the ones with short term benefits.
e) Risk associated
Different investment is associated with different risks such as market risk, interest risk,
legislative risk, timing risk, liquidity risk, currency risk and redemption risk among others.
Although, it is argued that the majority of the investments are affected almost by the same risk
but there are some which are likely to manage the risk to insignificant effect. Such risks which
are manageable include timing risk, currency risk and liquidity risk (Awais, et al. 2016).
Also, the risk associated with the loose of investment can be avoided by intensive research to the
super fund of the choice.
Please note, risk takers investors tend to reap more than the risk-averse. Also note, the lower the
risk by the super fund, the higher the returns and vice versa.
f) Services offered
When choosing the super fund, it is important to find out the type of services offered by the firm
and whether they align with your long term goals. It is also of benefits whether such services are
chargeable or not, whether they are of a long term or short term and if they are professionally
provided by the super fund under consideration or not. Such services should also align with super
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fund objectives and mission. Example of services which may be offered by the super fund
includes financial advisory, investment advisory, and post-retirement advisory.
g) Insurance
Investment involves a lot of risks. It is important when choosing the super provider to research
whether it provides protection for the income and whether it has life and total permanent
disability covers and at how much. Therefore, it is advisable to choose the super which provide
such services. Also note, funds with a low fee does not provide such services which are also a
factor when choosing investment super fund.
h) Type of funds
There are different types of funds which can be considered when making an investment decision.
In Australia, such funds include MySuper, Retail fund, industry fund, public sector fund,
corporate fund, and self-managed fund among others (Blake, 2015). Such funds are associated
with merits and demerits. To mention a few, the funds like retail fund offer low-cost options
which make them attractive but on the other side, they retain high profit. Industry funds also
offer a low-cost option and are also not for profit. The profit gained is returned to the fund for the
benefit of members. Lastly but not least is a corporate fund which is arranged by the employers
for their employees. The fund tends to be of low to mid-cost for the potential employer but very
expensive for small employers.
Other issues such as time value of money, taxation and opportunity cost which may also
affect the choice of super fund
Time value of money
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When considering which investment to choose, it is also very crucial to understand that, the
value of a dollar today may not be the same as the value of the dollar tomorrow. This can be
discussed below;
When the dollar is invested today, it can earn interest over time hence giving potential earning.
Secondly, money can be affected by inflation which reduces currency spending power over time.
Finally, the money is associated with risk which at a time can interfere with the income in the
future.
Therefore, it is important to factor out the time value of money when choosing the investment
plan. That is, the super fund which factors in the time value of money is desirable and tend to be
attractive.
Taxation
Taxation determines the type of contribution to make and personal circumstances. For instances,
low earners are less taxed compared to higher earners. Also, taxation will depend on the type of
super fund taken and also the prescribed condition met.
It is important to note, the taxation depends on the investment type and the savings made.
Opportunity cost
It is the benefit missed over choosing an alternative investment plan over the other. Opportunity
cost may be unnoticeable but is very important. Employees and employers should avoid
switching from one fund to another since it involves some cost which affects the expected
benefit.
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Recommendation
When choosing the super fund, it is important to carry out primary research to find out which
option aligns to your goal.
It is also important to get historical back-group of the fund in order sure of its reliability and
future risk.
Also note, there is no guarantee that the benefits you expect today are what you will receive in
the future. What you will receive is determined by the fund performance.
Conclusion
As discussed above, when choosing super fund it is important to put into consideration all the
factors which may affect your contribution.
Secondly, the type of fund you chooses should align with your goal. Services provided should be
of benefit and cost-efficient.
Lastly, before choosing the fund, you should be aware of the terms and conditions provided
whether favorable or not.
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References
Agnew, J.R., Bateman, H. and Thorp, S., 2012. Superannuation knowledge and plan behavior.
UNSW Australian School of Business Research Paper, (2012ACTL14).
Anderson, M.E., Clark, M., Ramsay, I., and Shekhar, C., 2016. Super behavior: a note on young
Australian adults' engagement with their superannuation accounts. Australasian Accounting,
Business and Finance Journal, 10(4), pp.58-69.
Awais, M., Laber, M.F., Rasheed, N. and Khursheed, A., 2016. Impact of financial literacy and
investment experience on risk tolerance and investment decisions: empirical evidence from
Pakistan. International Journal of Economics and Financial Issues, 6(1), pp.73-79.
Blake, D., 2015. Issues in Pension Funding (Routledge Revivals). Routledge.
Byles, J., Tavener, M., Robinson, I., Parkinson, L., Smith, P.W., Stevenson, D., Leigh, L. and
Curryer, C., 2013. Transforming retirement: New definitions of life after work. Journal of
women & aging, 25(1), pp.24-44.
Chant, W., Mohankumar, M. and Warren, G., 2014. MySuper: a new landscape for default
superannuation funds. CIFR Paper, (020).
Feng, J., Gerrans, P. and Clark, G., 2014. Understanding superannuation contribution decisions:
Theory and evidence. Working Paper, CSIRO-Monash Superannuation Research Cluster,
Melbourne.
Gallery, N., Newton, C. and Palm, C., 2011. Framework for assessing financial literacy and
superannuation investment choice decisions. Australasian Accounting, Business and Finance
Journal, 5(2), pp.3-22.
Productivity Commission, 2012. Default superannuation funds in modern awards. Inquiry
Report, (60).
Productivity Commission, 2015. Superannuation policy for post-retirement.
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