Self-managed super funds still providing smaller returns than APRA regulated funds: ATO

If you think you are better off managing your own superannuation, you are probably wrong.

The ATO has released the latest data for self-managed superannuation funds (SMSF) and although it is clear they are increasingly popular, it is not clear why.

SMSFs have consistently underperformed their APRA-regulated counterparts.

In the year ending June 2015, SMSFs returned 6.2 per cent on assets. By comparison, APRA-regulated funds returned 8.9 per cent for the same period.

And that underperformance has been the story for the last five years.

Yet despite most people earning less money by putting their super into an SMSF, increasingly people are deciding to take control of their retirement savings themselves.

Over the last five years the number of SMSFs has grown by some 31 per cent.

SMSFs now make 99.6 per cent of the number of funds and 29 per cent of the $2.1 trillion total superannuation pool ($622 billion).

Size of nest egg crucial to cost-effectiveness

SMSFs are a huge income source for those people who are paid to manage the funds on behalf of the trustees (who the super belongs to).

The estimated average total expense ratio of SMSFs in 2015 was 1.1 per cent and the average total expenses value was $12,200.

Back in 2013, ASIC asked consultants Rice Warner to examine what the minimum cost-effective fund balances were for self-managed superannuation funds.

Put very simply, they found that SMSFs needed at least $200,000 to be cost-effective if trustees had the necessary skills and time to do some of the fund administration themselves.

Otherwise, SMSFS would need a fund balance over $500,000 in order to be cost effective.

The problem is that at the end of June 2015, some 42.8 per cent of funds have less than $500,000 assets and 19.1 per cent have less than $200,000.

Put simply, you need a big pool of money in your super fund to give you economies of scale in managing the money. This graph from the ATO clearly shows how the expense ratio falls dramatically for SMSFs when the fund size gets larger.

And this shows how small funds actually go backwards.

Many people like the sense of control that a SMSF gives them; the ability to choose where the money is invested.

But what these numbers show, though, is that before you put your money in a SMSF, it is prudent to make sure the numbers add up.