The Cooper review has based its assessment of appropriate management fee levels of default funds under MySuper on unrealistic assumptions about managing alternative assets, according to research house Chant West.
The Cooper panel has based their assumptions on a report by Deloitte, in which the costs of a default fund with a 70/30 per cent allocation to equities and fixed-come assets are estimated under a MySuper regime.
Large funds, which have more than $20 billion in assets under management, should be able to run balanced options with a 10 per cent allocation to alternatives at a management expense ratio (MER) of 36 basis points, according to the report.
But this estimate includes the assumption that the management of a balanced bundle of alternative assets should cost about 89 basis points.
"We think this is far too low - 2 to 3 per cent is more realistic if all the costs of alternatives are included," Chant West head of research Ian Fryer said.
Fryer said a super fund with less than 60 basis points in total costs was unlikely to be a true actively managed portfolio.
"You just end up with a lot of indexing in your portfolio," Fryer said.
Alternative investments, including unlisted assets, are important for super funds because they enable them to get higher returns, partly because they are paid an illiquidity premium for their investments, Fryer argued.
Placing unrealistically strict requirements on fees would lead to lower alternative holdings, or even no allocation to these assets, and thus lower returns, he said.
"Yes, unlisted assets are difficult, but they generate better returns for members," Fryer said.
The research firm has been an outspoken critic of the MySuper proposals, with Chant West managing director Warren Chant stating that MySuper should be relegated to the dustbin.
Fryer argues it would be much better if investors in a default fund were offered a wider range of investment options, potentially between 5 to 10, without having to move out of the default product.
"If you want to choose one different option why would you have to move out of MySuper?" Fryer said.
He also argued that a standard balanced fund would not be appropriate for all age groups, especially not for those people close to retirement.
Fryer said the government should take feedback from the industry into account and not follow the recommendations in the Cooper report to the letter.
"It is interesting to see where [Minister for Superannuation] Bill Shorten takes this, because it is a decision that you can get wrong," Fryer said.
