DIY super funds show experts how it's done
Many people would be surprised to learn that the biggest sector in Australia's superannuation industry isn't industry funds or the big retail funds that dominate the headlines. Nor is it government or employer funds.
Many people would be surprised to learn that the biggest sector in Australia's superannuation industry isn't industry funds or the big retail funds that dominate the headlines. Nor is it government or employer funds.Yes, 99 per cent of super funds and almost one-third of super assets are in the hands of self-managed super funds run by, and on behalf of, ordinary investors. The latest figures show these "mum and dad" funds numbered almost 500,000 and controlled a whopping $418 billion in retirement savings.Between 2007 and 2011, an average 2500 funds were set up each month, with members now totalling about 867,000.The popularity of SMSFs has long been a source of aggravation for managers who seem to find it hard to believe that do-it-yourself investors can handle their money just as competently as the experts.They claim that people are being pushed into SMSFs by fee-driven salespeople, when they have neither the savings to justify having their own fund nor the interest and expertise to look after it.However, the latest figures from the Australian Taxation Office (which regulates SMSFs) paint a different picture. The overview for 2009-10 shows that most SMSFs are growing and being put to work, rather than withering on the vine. Let's clear up some misconceptions.1. Many funds are too small to justify the costs.According to the ATO, the size of funds has been increasing at the same time as costs are falling.In the latest analysis, the average SMSF had assets worth $888,000 at June 30, 2010. Median assets (which weed out the distorting effect of the 26.7 funds with more than $1 million) were $512,000, which is still well above the $200,000 often cited as the minimum needed to make a SMSF cost-effective.The stats show that the proportion of funds with less than $500,000 has been falling, while the proportion with more than $1 million has been growing.In 2010, less than a quarter (24.2 per cent) of funds had less than $200,000 in assets, while 26.7 per cent had more than $1 million.The median balance per member was a healthy $286,000.At the same time as assets have risen, costs have been trimmed.The estimated average operating expense ratio of SMSFs fell from 0.69 per cent in 2008 to 0.54 per cent in 2010, or about $4840.Of course, just how big a bite that takes from your savings depends on the size of the fund, and the industry is right to argue that you need scale to justify the expense.Self-managed funds with less than $50,000 paid, on average, a whopping 7 per cent of their assets to run the fund - well beyond what you would pay in even an expensive public super fund. But the majority of funds (almost two-thirds) had estimated costs of less than 1 per cent and 38 per cent paid 0.25 per cent or less, which is hardly the ripoff the critics claim.The question of costs also overlooks the intentions of the investors in setting up the fund.If you were going to set up a SMSF with less than $50,000 and had no real plans for its future, it would be a costly investment.But the figures show SMSF members not only have higher account balances than investors in other super funds, they also have higher incomes. The average income of SMSF members in 2010 was almost $91,000, compared with about $51,000 for members of other super funds. Those aged 35 to 49 had average taxable incomes of $114,000.The figures show a continuing trend for new funds to be set up for younger members - many of whom could argue that while their super balance may not be high at the moment, they certainly have the means to grow it.2 . Funds are being set up for people who are disengaged.If managing your fund and growing it are any indication, SMSF investors are more actively involved with their super than other fund members.Throughout the five years to 2010, contributions to SMSFs averaged $34.2 billion a year, of which $25 billion came from members and $9.2 billion from employers. Member contributions outstripped those made by employers by about three to one.Those figures are somewhat skewed by 2007 (when the government changed the contribution limits but allowed a final chance to contribute up to $1 million) but even in 2010 member contributions outstripped employer contributions by about this level.That doesn't suggest a lack of interest quite the opposite.The overview also shows SMSF investors are direct investors who move money around in response to changing circumstances.In recent years there has been a shift to listed shares and (to a lesser extent) other managed investments, away from cash and term deposits.Following losses in 2008 and 2009, most self-managed funds reported positive returns in 2010.The overview also shows a trend of SMSF being used in retirement as well as during members' working lives, with just more than a third of funds now paying pensions.3. Funds are at risk of being mismanaged.It was reassuring to note that, despite the best efforts of the spruikers, residential real estate still makes up only a small proportion of super fund assets, at 3.8 per cent.While just more than 10 per cent of funds reported having all their money in one asset, this was more common with smaller funds and as funds grew they tended to become more diversified.Almost 38 per cent of funds with $50,000 or less held only one type of asset but this was typically cash and term deposits.The biggest problem for SMSFs continues to be compliance, with about 2 per cent of funds subject to auditor contravention reports a year. In the year to June 30, 2011, the number of funds reported rose by 8 per cent and the number of contraventions by 20 per cent, with the most common being loans or assistance to members, in-house assets and lack of separation of fund and personal assets.However, just less than half these contraventions were reported as being rectified.