Summary: Many Australians with superannuation balances over $150,000 are encouraged to break free of superannuation funds and set up a self-managed super fund (SMSF) as it gives them freedom to invest in many more financial products (including direct property ownership) as well as transfer other assets within the tax-shelter of their SMSF.
However, a low-fee, high-performing industry superannuation fund is almost always a better option for 90% of individuals using or considering SMSFs. SMSF fees, risks and complexity are only really worthwhile when your super fund size is over $500,000 and you are genuinely taking advantage of superior investment products.
In this post, I discuss two common alternatives offered within super funds that provide greater investment flexibility with minimal extra effort: DIY Mix and "Member Direct". Most super funds offer DIY Mix (you allocate percentages to Australian Shares, International Shares, Property, Fixed Interest). The larger industry funds offer a "Member Direct" option as well which allows direct purchases of large cap Australian shares, popular ASX-listed ETFs and term deposits. I use Australian Super as the example fund as it's what I use personally and is the largest. Terminology and details may be slightly different for other funds.
Nevertheless, for most people, regardless of super balance size, the best option is to stick to the Premixed standard options, especially the Balanced (or MySuper) option. Often the Balanced option of large funds has access to unlisted assets that generate excellent returns relative to risk. Greater investment flexibility is only needed by those who properly understand investing or have significant investments outside super and thus need a non-standard allocation within super.
My Situation: I have $140,000 invested almost always in the Balanced option of Australian Super - the largest industry super fund which has low fees and high performance due to its scale and unlisted investment opportunities in infrastructure, direct property, private equity and other assets. If I had a lot more of my savings in super, I might use Member Direct to directly purchase some Vanguard ETFs and even some ASX200 stocks at opportune times. However, with only $140,000 total, the $395/year Member Direct fees are not worthwhile. I might also occasionally use DIY Mix for around half of my balance if I want to temporarily increase or decrease exposure to Australian or International stocks (e.g. Put $70,000 in DIY Mix and allocate 100% to International equities).
Details:
1. A large part of superannuation performance is about fee minimisation. For fund sizes under $500,000 the SMSF fees are well above the best value industry super funds. Also, average SMSF returns are always worse than industry super funds
According to the authoritative superannuation site SuperGuide the annual fees (operating expense) for SMSFs are enormous for small fund sizes and will clearly overwhelm any performance benefits. Even at a fund size of around $500,000 the annual fees average 1.35% are are unlikely to be minimised below 1% especially once the cost of investing is included.
Contrast that with the lowest-fee, high-performing industry super funds. Australian Super charges a fixed annual admin fee of around $78 and investment fees of 0.73% or lower. The annual fees for $500,000 invested in the Balanced option would be $5000,000 * 0.0064 + $78 = $3,278 (0.656%).
It's also important to note that while some SMSF providers may advise that minimum annual fees can be less than 1%, this doesn't include the transaction costs of most types of investment options. SMSF investment fees will always be higher than for industry super funds due to scale. And the more specialised the investment option, the greater the fees. This is why SMSFs usually only make sense for fund sizes well in excess of $500,000 and that are actually utilising superior investment products (most SMSFs aren't).
You can read more about the main reasons why SMSFs should be avoided by most people on the ASIC MoneySmart website: Self-manager super fund (As usual, ASIC understates the disadvantages and risks).
The majority of SMSFs underperform industry/public super funds
The whole purpose of switching to an SMSF is supposed to be having greater investment control in order to achieve better returns. Yet, the majority of SMSFs generate lower returns that the median super fund every single year. As industry/public funds have the highest returns, the gap is even larger between them and SMSFs.
"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."
ABC News - Self-managed super funds still providing smaller returns than APRA regulated funds: ATO
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."
ABC News - Self-managed super funds still providing smaller returns than APRA regulated funds: ATO
2. Super funds DIY investment options
A typical super fund investment involves simply choosing the risk level that suits your age and circumstances. In order from highest risk (and potential return) to lowest these are commonly:
- High Growth
- Balanced
- Index-tracking equities, property and fixed interest (Australian Super calls this "Indexed Diversified")
- Conservative Balanced
- Stable
- Capital Guaranteed
The proportion of Cash, Fixed Interest and Credit investments increases as the risk is lowered. The proportion of Australian and International equities decreases as the risk is lowered. The composite asset mix investments and proportions are managed by the fund, so the only discretion is over the Premixed option.
Also, you don't have to completely dispense with Premixed options. You can allocate to multiple Premixed options or combine Premixed options and specific percentage allocations to individual asset classes.
The way this is done is by simply completing an allocation table which lists all of the Premixed options and individual asset classes. You simply enter percentage allocations that sum to 100%. In the below example I have kept 50% in Balanced and put 40% in International shares and 10% in property. You might do this if you have significant savings outside super invested in Australian shares and wish to tilt your super allocations toward high return assets that aren't Australian shares.
There is one critical warning to take note of in choosing to use DIY Mix investments instead of Premixed and that is that DIY does not have access to some of the best performing unlisted investments.
The principal reason I keep my super 100% invested in the Premixed Balanced option is because I wish to maximise investments in high quality unlisted assets some of the large super funds own: infrastructure, direct commercial property, private equity and credit. Typically only the Balanced option has significant proportions of these unlisted assets as it is by far the largest investment pool.
There are times I would love to fine-tune my Balanced investment allocations in Australian equities, International equities and Fixed interest. And I would always want Cash at 0% as I can get much better returns in retail term deposits. However, I would be giving up too much exposure to the high-performing unlisted assets in doing so.
Australian Super
> Premixed investment choice
> DIY Mix investment choice
3. Australian Super Member Direct alternative to SMSF
Member Direct is AustralianSuper’s self-managed investment option. "It’s designed for members who want more control and choice. You can invest in stocks in the S&P/ASX 300 Index, Exchange Traded Funds (ETFs) and term deposits – all from an easy-to-use online platform. In fact, the Member Direct option offers many of the features of a self managed super fund at a fraction of the cost."
You can invest in this option if you’re an AustralianSuper member and meet the minimum total balance requirements shown below:
Once you enable Member Direct you are charged a fixed admin fee (currently $395/yr) regardless of whether you use it or not. Given the size of this fee, my advice is that most people shouldn't keep Member Direct active unless they have at least $50,000 invested through it.
It's also important not to have funds sitting in the Member Direct holding account that aren't invested as these are not earning a return.
The brokerage fees are reasonable and scale down at higher amounts so where possible you should make investment changes in large lump sums.
The Australian Super Member Direct Investment list is below. You can invest in any ASX300 share as well as popular ETFs for shares, gold and fixed interest.
A text list of the ETFs is provided below:
Australian share ETFs†
IHD iShares S&P/ASX Dividend Opportunities ETF No limit§
ILC iShares S&P/ASX 20 ETF No limit§
IOZ iShares MSCI Australia 200 ETF No limit§
ISO iShares S&P/ASX Small Ordinaries ETF 20%
SFY SPDR S&P/ASX 50 Fund No limit§
STW SPDR S&P/ASX 200 Fund No limit§
SYI SPDR MSCI Australia Select High Dividend Yield Fund No limit§
UBA USB IQ MSCI Australia Ethical ETF No limit§
VAS Vanguard Australian Shares Index ETF No limit§
VHY Vanguard Australian Shares High Yield ETF No limit§
VLC Vanguard MSCI Australian Large Companies Index ETF No limit§
VSO Vanguard MSCI Australian Small Companies Index ETF 20%
YMAX BetaShares Australian Top 20 Equity Yield Maximiser Fund No limit§
International share ETFs – developed markets (global)†
IOO iShares S&P Global 100 ETF No limit§
IRU iShares Russell 2000 ETF 20%
UBW UBS IQ MSCI World ex Australia Ethical ETF 30%
VGAD Vanguard MSCI Index International Shares Hedged ETF No limit§
VGS Vanguard MSCI Index International Shares ETF No limit§
WDIV SPDR S&P Global Dividend Fund 20%
WXHG SPDR World ex Australia (Hedged) Fund No limit§
WXOZ SPDR S&P World ex Australia Fund No limit§
International share ETFs – developed markets (regional/country)
IAA iShares Asia 50 ETF 30%
IEU iShares Europe 350 ETF 30%
IJH iShares Core Mid-Cap ETF 20%
IVE iShares MSCI EAFE ETF 30%
IVV iShares Core S&P 500 ETF 30%
VEU Vanguard All-World ex-US Shares Index ETF 30%
VTS Vanguard US Total Market Shares Index ETF 30%
International share ETFs – emerging markets†
IEM iShares MSCI Emerging Markets ETF 30%
VGE Vanguard FTSE Emerging Markets Shares ETF 30%
Commodities ETFs†
QAU BetaShares Gold Bullion ETF (A$ Hedged) 20%
Australian Fixed Interest ETFs†
IAF iShares Composite Bond ETF 30%
ILB iShares Government Inflation ETF 30%
VAF Vanguard Australian Fixed Interest Index ETF 30%
VGB Vanguard Australian Government Bond Index ETF 30%
Further Info:
ASIC MoneySmart
> Self-manager super fund
Australian Super
> Investments & performance
AustralianSuper YouTube
> AustralianSuper Asset Allocation
> Meet the investment expert: with Alistair Barker
Cuffelinks
> Self managed super’s best-kept secret
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