Australians are moving more than $14 billion a year from their industry or employer superannuation funds into self-managed funds. It is a big trend, which shows that people like the control that operating their own super fund gives them.
However, it is important to recognise that the control a self-managed fund offers comes at the cost of much greater responsibility. What makes a self-managed fund different from other kinds of super is that the members must also act as trustees; they have to take on the administration of the fund.
Almost a million people bear that responsibility, so it can't be too bad. But it is worth keeping in mind that the Australian Taxation Office (which is responsible for the regulation of self-managed funds) declares a couple of hundred funds non-complying each year because the trustees have done a bad job. Once a fund is made non-complying it loses all the generous tax concessions that the superannuation system allows.
And the government is increasing the burden of responsibility on trustees. Part of its Stronger Super reform package includes requirements for more rigorous fund auditing and accounting and more regular fund reviews.
There can be no more than four members of a self-managed fund and all members must also act as trustees. Alternately, they can be directors of a corporate trustee that administers the fund.
The trustee must see to it that the trust deed is set up correctly, the fund is registered with the ATO, a separate fund bank account is opened and an investment strategy is prepared.
The trustees have to maintain financial records (or hire a service provider to do the job), make sure investments comply with superannuation law, and have a financial statement and audit prepared each year. All self-managed funds must have their financial accounts and compliance with superannuation legislation audited each year by an approved auditor, and it is the job of the trustee to make sure that happens.
Trustees are responsible for making sure contribution caps are not breached and that, if the fund has pension accounts, the right amount of pension is paid each year (again, these jobs can be done by a service provider).
The trustees must write the fund's investment plan. A change to the rules that took effect in July means that trustees must review their investment plans each year to make sure the strategy continues to reflect the purpose and circumstances of the fund and its members.
Keeping out of trouble
In the 2009/10 financial year (the most recent year for which figures are available) the Australian Taxation Office made 185 funds non-complying, which meant they lost their concessional tax status. Common contraventions included inappropriate loan arrangements, breaches of the in-house assets test, use of illegal early release schemes and lack of proper documentation of the fund's ownership of assets.
The in-house assets test says that funds are not allowed to invest more than five per cent of their assets in in-house assets. These include loans to related parties, investments in related party businesses and lease arrangements between a trustee of the fund and a related party.
Early release schemes are arrangements where a self-managed fund is set up with the purpose of taking money out of the system before the member is entitled to the benefits.
The government plans to give the ATO stronger regulatory powers. In September, Treasury released draft legislation for industry consultation. The new law would give the ATO greater power to direct trustees to rectify contraventions, require that trustees undertake education programs and impose a range of fines for non-compliance.
Running a self-managed fund is getting cheaper
Average operating expenses for self-managed super funds in 2010 were $4840, compared with $6389 in 2008, according to the Australian Taxation Office.
Like the ATO, Rice Warner Actuaries has found that fees have been coming down. It puts the trend down to the following reasons: more trustees are using low cost index funds for some or all of their equity exposure; new funds and administrative services offer more competitive pricing; and bigger account balances and bringing the expense ratio down.
Self-managed fund administration has a number of fixed costs, such as establishing a trust deed, preparing annual accounts and an annual audit report. So the bigger the fund the lower the fees as a percentage of funds under administration.
The ATO estimates that the average expense ratio for funds with less than $50,000 in assets is seven per cent. Once fund assets exceed $500,000 the expense ratio falls below one per cent. From a cost point of view, people with small balances (under $200,000) might find a self-managed fund hard to justify.