Size matters for DIY super funds

Bigger isn't always better, but when it comes to self-managed super funds (SMSFs) new research shows that size really does matter.

The number of Australians choosing to manage their own retirement nest egg has skyrocketed in recent years.

Figures from the Tax Office show there are now 577,000 SMSFs nationally, up from 440,000 in 2010. These do-it-yourself funds collectively hold $622 billion in assets – almost one in every three dollars invested in our super system.

Running your own super fund can be rewarding. But it’s not for everyone, and it can be an expensive option if you have limited super savings.

Along with the initial outlay required to establish a fund, SMSFs also face a variety of costs associated with meeting legal and reporting obligations as well as managing investments.

These expenses can rapidly eat into your super savings. In fact, having at least $200,000 in super is regarded as a key benchmark for SMSFs to be financially worthwhile.

A recent study by SuperConcepts and the University of Adelaide found SMSFs with balances below $200,000 face higher expense ratios than larger SMSFs. Let me explain. Tax Office data shows that in 2015 SMSFs faced average total running expenses of $12,200. That’s a far higher proportion of the funds invested in a small fund than it is for a larger SMSF.

The same survey also found it is harder for small SMSFs to achieve a high level of investment diversification, and as a result the fund returns can be lower.

Interestingly, this research confirms earlier findings by investment watchdog ASIC that SMSFs with less than $200,000 in assets are unlikely to be competitive compared to a professionally managed super fund.

Sure, there are times when it may be fine to start your own super fund with a small balance. You may, for instance, be expecting to make a substantial contribution in the near future following the sale of a business or through an inheritance.

It is possible to save on costs by taking on much of the fund’s administration and investment management yourself. However, you need to know what you are doing – and have the time to devote to managing your SMSF. Not surprisingly, many SMSFs outsource some, if not all, of the investment, accounting and tax work to professionals.

The main point is to carefully weigh up the decision to use a SMSF – preferably with the benefit of expert advice, especially if you have a modest nest egg. Compare the cost of using a SMSF with the fees you’ll pay in a professionally managed fund. After allowing for the value of your own time, you may find it is cheaper (and easier) to invest your super in a large, well-run fund.

 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Are your details up to date?

We’re giving away an iPad mini every month. Simply update your contact details today for a chance to win.

Update details now

Explore your goals

Try our online tool to explore, prioritise and create your own goals timeline.

Start exploring

Choosing your super fund

See what choices you have when it comes to super and what to think about when selecting investment options with our online learning module.

Start now

Subscribe to News&insights for a chance to win one of three iPhone 7's

Subscribe now

Recommended articles

Important information

Show more

© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.