DIY not for everyone
Almost 1 million people now have their own funds, with annual growth in the number of do-it-yourself funds running at about 8 per cent.
More members of large funds are striking out on their own, mainly because they want more control over how their retirement savings are invested, and because of disillusionment about the poor performances of large funds.
For many people, especially higher-income earners and those with their own businesses, running their own funds can make a lot of sense.
But they are not for everyone. Those with small account balances and those not prepared to put in plenty of time and effort are probably going to be better off sticking with a large fund with low costs and cheap life insurance.
And although the returns of large superannuation funds have been poor since the onset of the global financial crisis five years ago, they are improving. Over 2012, the typical balanced investment option, where most people have their retirement savings, produced a return of more than 10 per cent. There is every chance returns will be good again this year.
Large funds have the benefits of their scale, with the best having fees as low as 1 per cent of the money invested, although some large funds can be expensive. Those running their own funds with assets in the fund of less than about $500,000 would be hard-pressed to have costs of 1 per cent.
The reason for the poor performances of large funds and the cause of the recent turnaround in performance is that the typical balanced option has about half the money invested in Australian and international shares. That makes the performance of shares the most important driver of returns.
Anyone with higher exposures to interest-paying investments such as term deposits, fixed interest and cash over the past five years would have done much better than the balanced options and their big tilts to shares.
A superannuation fund's balanced option is designed to give the best outcome over the long term for the majority of the fund's members. Most fund members are in their fund's balanced option because this is the type of option that most employers have as the default option for their new employees. And most new employees do not choose who manages their super.
No other investment can produce as good a return as shares over the long term. While a large exposure to shares benefits the majority of members over the long term, it leaves members with not that much time left in the workforce exposed to sharemarket corrections.
But large funds have a range of investment options with differing mixes of assets. Some are more conservative with higher weightings to interest-paying investments where the capital is stable, or fairly stable, even when share prices are falling. Most fund members are free to switch to another of their superannuation funds' investment options or to another superannuation fund altogether.
Frequently Asked Questions about this Article…
A DIY superannuation fund (do-it-yourself fund) is when individuals set up and run their own superannuation rather than staying in a large industry or retail fund. Nearly 1 million people now have their own funds, and the number of DIY funds has been growing at about 8% a year.
Setting up your own super fund can make a lot of sense for higher‑income earners and business owners who want more control over how their retirement savings are invested. Those people can potentially tailor investments and strategies to their needs, which is a main reason many choose DIY funds.
People with small account balances and those unwilling to put in the time and effort to manage investments are often better off staying with a large fund. Large funds can offer low costs and inexpensive life insurance — benefits that are hard to match for smaller DIY funds.
Large funds had poor performances following the global financial crisis (around five years ago), but performance has been improving. For example, the typical balanced option returned more than 10% over 2012, and there’s a good chance returns could be strong again in subsequent years.
Large funds benefit from scale and some of the best have fees as low as about 1% of money invested, though some large funds can be more expensive. If you run your own fund with less than roughly $500,000 in assets, it would be hard to achieve total costs as low as 1%.
A balanced option is a common default investment choice that aims for the best long‑term outcome for most members. The typical balanced option holds about half its money in Australian and international shares, so share market performance is a major driver of its returns.
Yes — over the past five years, investors with higher exposures to interest‑paying investments like term deposits, fixed interest and cash would have generally outperformed balanced options, because balanced options had big tilts to shares during that period.
Yes. Most large super funds offer a range of investment options with different mixes of assets, including more conservative options with higher weightings to interest‑paying investments. Members are generally free to switch between a fund’s options or to another superannuation fund altogether.
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