A super question (updated)

Reader, Bamboozled, recently left a comment on my “Trouble with Funds Management” post, asking what direction to go with her super:

I’m a 30 something trying to consolidate a sizeable sum spread across 4 funds into something that resembles a reasonable super bet.

At the most basic level I have 2 lots of dosh in corporate funds (but from what I can gather one of those is actually a corporate plan within a retail fund?) one in a government fund and one in what I think is retail.

If reveiwing the ratings tables is only going to tell me how these institutions are performing against a flawed index, then what sort of questions SHOULD I be asking the respective funds to get an answer that will assist me to make an empowered (and hopefully profitable) choice?

As a rank industry outsider – how does one go about identifying an option that will make a real rate of return, without having to go down the SMSF path? I really don’t have the financial savvy (or to be frank the inclination) to go there.

At this stage I think this means I need to see a financial planner, but that leaves me feeling like I will be swimming with hungry pirhanas! What sort of questions should I be asking a Financial Planner to avoid the commission trap, and to be able to make a discerning choice about their abilities to best represent my interests?

Super = Frustration
Bamboozled’s frustration is widespread, and a result of the evolution of the superannuation industry through the myriad mutations imposed by successive governments, industry participants and media. For Generation X particularly (and I count myself among them, though I despise the classifications) the complexity of super is overwhelming and its no wonder that apathy sets in. This is exarcebated by the fact that most Gen X and Gen Y’s may have up to 5 or more jobs within the first 10 years of employment (and probably will change again that many times in subsequent decades).

Therefore, by fault and not design, most will have at least 3 if not more superannuation funds and will receive mind numbing multi-page long “statements” around August each year and will rightly put them in a pile and forget about them – hey its not like you can use the money anyway right?

Fix the Structure First
So the first problem to solve here is structural: aggregating those super funds into one fund. There are a couple of issues:

Firstfind your super. You may have moved a few times and not sent a forwarding address. You probably have forgotten one or two funds you had whilst working part time at uni. The stories are not unique (I had 4 funds at one stage, The Princess had six) – the government helps here with SuperSeeker. Simply type in your name and date of birth and Tax File Number and it will track down any undeclared super hidden away.

Nextchoose a single fund to put them all into. This is a hard one because it depends on your situation, particularly: where you are working and the overall equity balance of your super.

Where you work
Contrary to popular opinion, most employees don’t have a choice where their super goes. Public servants are usually forced to use the government sponsored fund (e.g Queenslanders are stuck with QSuper, whilst defence personnel are stuck with the similarly poorly performing Military Super) whilst those in the private sector at major corporations are usually funnelled into large corporate funds with similar constraints, or perverse incentives as part of their remuneration (e.g additional employer contributions into super, but ONLY with their mandated fund).

If you fit one of these areas and are reluctant or unable to change your fund, change your current allocation option to cash (I’ll explain why in a later post) and aggregate your other funds into it.

Be careful too with private employer funds as they may have an insurance package that you will lose if you opt out (usually income protection). At this stage, most people do not require substantial insurance (it becomes more important when you have a dependent spouse or children, or large mortgage debts), but it’s something to look out for nonetheless.

Balance
If your total super – across however many funds – amounts to less than $50,000 or so, then the focus should be on finding the lowest cost fund with the highest performing cash option.

Why? Because to be frank, your super at this stage is basically a savings account. Allocating any funds to extremely risky options like shares, property and infrastructure exposes your small balance to high volatility. This is usually not a problem (volatility is good – it allows you to buy on the low side and sell on the high side – volatility is not risk), but with non-self managed super funds, your fund will actually record your balance down when the underlying asset goes down in value.

This is because they are effectively trading your super on the market and need to “mark to market” their results. So if the ASX200 goes down 9% (as it currently stands from the mid-April high), then your super balance (invested in equities) will be marked down 9% and you will realise this loss. This is the difference between risk and volatility – the risk with non-self managed super is that the volatility “losses” are realised. This has a huge negatively compounding effect on your equity over the lifespan of your super – measured in decades.

Here’s an example. Suppose you had $50,000 in super. Your cash option is a paltry 4.5% per annum, whilst your share option seems to “average” 8% growth – but with volatility of a 10% loss every four years. What would be the result (assuming no fees – remember the share option management fee would be about triple the cash fee)

Cash vs shares over 30 years

The effect of losing even 10% of your super in one year with 30 years of accumulation to go is more devastating than “missing out” on the 3.5% extra annual gain – if stock markets can do 8% per annum (which they don’t – but that’s for another article).

Choice – where to find comparisons?
This can be very frustrating, but when you consider your super as basically a savings account, choosing the right one becomes a lot easier. There are some websites that help rate the performance of the myriad super funds, SuperRatings is the standout. They have an easy function to search the top 10 funds by asset allocation/investment choices.

As of today, it appears the best results for cash (over a five year period) are:

Top 10 funds with best cash options

Update on Cash Choices
Readers John and Ben enquired to the composition and low returns of cash funds in super, in comparison with non-super retail cash returns. I’ve had a closer look at the top 3 funds mentioned above and here’s what I found:

Tasplan – use the Colonial First State Wholesale Premium Cash Fund, which mainly invests in 30-60 day deposits. Charges 0.41% per annum

FuturePlus – uses the QIC Cash Enhanced Fund (same as QSuper) which invests in AA rated credit (short term deposits). Charges 0.3% per annum

HOSTPLUS – unsure (website is very unhelpful, which is usual, but a quick call and they were helpful) After delving through 52 pages, it appears the managers are JPMorgan Chase and ING. 0.05% cost ratio which is very cheap.

Effectively all of them are following the UBS 90 day Bank bill index. For an idea on how this asset class has performed over the long term, check out the table below, constructed from Morningstar data. (h/t Chris Joye)

For now, forget about choices like “diversified fixed interest” or “enhanced cash” or similar – even if they look more stable. I’ll explain in a later article why cash is your best option at this stage.

Aggregating
So you’ve found all your super funds, you’ve made the choice of which one to put it into (cheapest and best cash option) now how to get them all together. Be prepared to having to wait weeks or months for the administration side of your old super funds to get their act together, mainly due to recent Anti-Money Laundering Legislation, but also because of reluctance of handing back “your” money. This is where big and concentrated funds make no sense – just like the banks and energy companies, customer service is woeful.

You will need certified copies of your identity – find your nearest Justice of the Peace and nearest photocopier and run off copies of your driver’s license, passport and utility bills. Make sure the JP certifies them correctly – super funds are notorious for handing back “failed” declarations of identity, just for a misspelled word or an illegible handwriting (or scanned picture of your mug on your driver’s license).

Non-SMSF choice for Gen X
Self Managed Super (or DIY or SMSF) is not for everyone, but should be for everyone. The system should be simple enough that anyone with a Grade 10 ability in maths and finance can run their own fund, but instead layer upon layer of lawyers, accountants, auditors and financial advisers are required to administrate what is effectively a savings account.

If your aggregated balance is nudging $100,000 more than $50,000 I would certainly consider this route, but only if you have the time and psychological wherewithal to step up to this superior option. Self Managed super can be costly, frustrating and poor performing if not managed properly. If you have difficulty with your other personal finances I would steer clear.

One of the greatest benefits of self managed super is the ability to get the gains of high risk assets like shares but hedging the volatility, and of course the flexibility that is unparalleled. These and other reasons are why DIY super is the biggest and best performing of all the super choices. More on that later.

Asking a financial planner
Bamboozled finally asks, what about seeing a financial planner? To be frank, with small super balances and the power of the internet, you can sidestep this option for a few (or many) years. When circumstances change – particularly a larger balance in your super, a much higher income, marriage, having children or take on large amounts of debt, then coming up with an integrated financial plan that includes super makes sense.

This article is in a series regarding “The Trouble with Super”, with an introduction and explanation of what to be covered here. New articles will be posted weekly/fortnightly.

Disclosure: The author is a Director of a private investment company (Empire Investing) and a former financial planner. The article is not to be taken as investment or general advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Comments

  1. Outsidetrader

    Some good analysis and some sensible tips – but the chart is misleading. By only earing 8% in three years and then losing 10% in the fourth year, you are assuming average returns on equities are actually 3.5% per annum (8+8+8-10)/4. Under such an assumption it’s not surprising that it earns less than cash at 4.5%.
    In this example, it’s not the volatility that killed the return, it’s just that you’ve assumed a lower average return for equities than cash. I’m not saying that’s necessarily an invaild assumption (though I’m not sure it’s supported by historical data), but I am suggesting that if you assume average earnings on euqities are lower than average earnings on cash then finding cash to be a better choice is the inevitable conclusion to be drawn, irrespective of volatility.
    If on the other hand you assume that shares actually average 8% per annum but fall 10% every fourth year, then they will earn 14% in each of the three growth years and fall 10% every fourth (14+14+14-10)/4 = 8. Modelling the results under this scenario would show equities to be a better choice. I’m not suggesting this proves equities are better, I’m just saying that your assumptions will drive your conclusion, and the assumption you have used is that on average equities grow 3.5% per annum while cash grows 4.5% per annum.

    • I’m a 53 year old who has put over $300,000 in super over the last 30 years. Today my current balance is $24,000. Where did the rest go? Stock market “adjustments”, fees & charges and general theft by a mix of the the government by forcing me to invest in shares only, fund managers theft by using my money to make theirs and letting me wear the losses.
      My advice is keep control of your money, cop the tax you have to pay as it will be a lot lower than the combination of stock market adjustments and fees.
      In my case I would have been better off putting my money into a savings account and paying 50% tax.
      Cheers,
      Peter

  2. Thats an excellent point and you are quite right outside.

    There are several reasons why I chose that assumption, which I will go into more detail in my asset allocation article. A typical one is that all financial planner use the (wrong) risk/return model of “you will likely experience a losing year 1 in every 4” for balanced/growth (i.e aussie shares) options.

    I’m just replicating that assumption.

    The main point is you will not lose 10% of your account balance every 4 years with cash and the opportunity cost of that loss far outweighs any potential subsequent gains over a long timeframe.

    Equities are extremely high risk, particularly if you diversify into the index fund (which is the default option) which has very high volatility, which is then realised by the super fund.

    Note that the best 5 year average return for Australian shares is 7.21% per annum (Catholic Super)

    3 years is 7.15% from BUSS (Q) – after that it trails off below 5%.

    Tactical asset allocation into equities makes sense at certain times, but overall, cash is the least risk and highest volatility adjusted return for non-self managed super funds.

    • I still think its a misleading chart.
      Most super funds / advisors run with the ‘losing year 1 in 4’ but a higher ‘target’ total return eg 3% above cpi or cash or whatever. I’m surprised you needed to doctor your assumptions to prove your point.

      I guess we could start arguing that over the long term equities as an asset class earn less than cash (which is your argument implied by your chart assumptions) but that is a separate argument where I think history and common sense proves you wrong.

      Also a bit confused by what your issue is with mark to market (‘realised’). Just because a fund reports the current value of an asset doesn’t mean they have sold it and therefore taken a loss.

      • I guess it depends on how often the big super funds turn over their investments. If they are chasing a certain % improvement over the market and report on a 6 monthly basis, then this may lead to short-termism which would increase transaction volumes. I am not sure if this is the case though – Prince?

      • Again Jake, as I said below, I’m not happy with the chart either, trying to show that concept is hard. I’ll work on an improvement.

        Also, yes share markets outperform cash on average over the long run – but where is your starting point? At 6700 points in November 2007 or 3100 points in March 2009? Do you dollar cost average each month or how often do you allocate shares over bonds?

        What I’m suggesting is that superannuation for most people should basically be a savings account – not a place to invest unless they know what they’re doing. Given the solid evidence that the majority of super funds DO NOT KNOW WHAT THEY ARE DOING – (e.g 2.5% average annual return over 10 years, unadjusted for inflation for retail funds), putting your funds in a low cash earning account is likely to be a superior choice.

    • Outsidetrader

      Thanks Prince. I look forward to reading your asset allocation article.
      While cash has been a superior investment option to equities in recent years, I will be interested to see what evidence there is to demonstrate that the same holds true over longer periods. All the data I’ve seen to date suggests the opposite, but I’m always open to looking at things from another angle 🙂
      I note from your data that the best 5 year return on Aussie shares (7.21%) is better than the best 5 year return on cash (5.44%), though I’m sure it’s also true that the worst 5 year return on equities is also worse than the worst 5 year return on cash, (but that’s volatility for you).

    • Outside, this is where tactical asset allocation makes sense for some people but not all. Also the time to access super changes the way you should allocate capital – not just the mathematically superior returns.

      e.g. a superannuant about to retire would have been better off in cash/fixed interest in the last 5 years for a majority (say 90% plus) of his super.

      that data of course includes the 43% drop on the All Ords – whereas the only drop was in yields on cash.

      I’m not happy with the chart either, its not showing what I’m trying to bring across – for a Gen X er with a small account, it is less risky overall to put most of your assets in cash, because you can’t take advantage of the volatility in shares without going to a SMSF.

      IF you try to rely on active managers to get you the 7.21% 5 year average, or 9.1% 10 year average, or 11.2% 30 year average, or 13.3% 100 year average (unadjusted for inflation) – you ain’t going to get nowhere near those numbers!!!!

      And of course, there’s always the risk of inflation with cash – another tome worth writing about but usually ignored……inflation is the biggest tax in super.

  3. The involvement of “lawyers, accountants, auditors and financial advisers” etc. is amply demonstrated by the returns that a cash fund produces. I have 75% of my super invested in cash. The return on this over the past 12 months? The 5 year return has been a paltry 3.3%. Over the latest 12 months it has returned 2.7% – at a time when my cash outside of super has earned in the range 5.5% – 6.0%.

    • Couldn’t agree more. The cash returns listed in the article are well down on what you can get by wandering into any mainstream bank. It makes me even more certain that the main purpose of super is just to transfer money from the poor workers to the rich bankers. The vast majority of super schemes don’t even earn enough to cover the real inflation rate.

  4. Prince,

    Thanks for the insightful article, and it is good to finally see a discussion (anywhere) for the thirty-something over the usual target of those ‘approaching retirement’.

    One question that always balks me is, how seriously should the thirty-something take super as a long-term investment? Seriously enough to put in extra at this stage of income-earning life? The potential tax advantages are clear, but on the other hand these funds will be held hostage to massive regulatory and demographic changes for the next 30+ years until retirement. The cynic in me half expects the value or indeed the whole concept of super to be diluted over time by the needs of government and perhaps other unexpected processes to do with demographic change. Obviously a SMSF is one possible solution to this. But given most people will stick with their regular fund, is it too early to make extra contributions or am I better off allocating disposable income to other investment activities?

    By the way, according with your advice I happened to move all my super to cash about 9 months ago. I did so after noting that the 5-year cash return of my industry fund exceeded all other investment options. Call me a plaid-wearing conservative, but I figured that a balance that goes steadily and simply up might in fact be a better idea than one that bounces around like a yo-yo.

    • Ben, I’ll be expanding on how to treat super as a Gen X/Y late Boomer in another article, but basically you hit it on the head – the regulatory risk outweighs the tax advantages, IMO.

      I’d rather have the cash in my back pocket (or debt paid off) at a lower rate of return than have it tied up in super for 30 years.

      My wife and I are in the “you’re crazy if you don’t salary sacrifice into super” tax bracket, but we don’t put an extra cent in there.

      In fact there are legitimate ways of using your super to “benefit” you now (e.g insurance and PM) – no not early access. Again, I’ll be going over this in a separate article.

      Blimey, at this rate, I’ll need to write a book.

      • You should write a book. It would reach a much wider audience. Consider this a challenge! You owe it to your future readers.

      • Thanks for the info Prince (esp your daily trading posts). It would be great for you to expand on the article especially on the GEN Y bit as I am one of those “Gen Y’s” you mentioned who has had multiple super accounts. Having various jobs while supporting myself uni and not knowing much about super and its purpose, got me membership to 4 funds !!! What’s the point of putting money away and not seeing it for 40-50 years. (now seeing the light of it)

        Currently working as a full time graduate, I’ve consolidated all my accounts into one, moved it into cash 5 months ago so I don’t loose 20-25% like my parents did during the GFC. Will take me some time before I can build up enough cash to open a SMSF to make it worth while.

  5. Great article, Prince.

    Because I saw the GFC coming, I moved my super allocation into “cash” a year or so before everything started to blow up in 2007/08.

    Now I fully expect a long and drawn out multi-year decline (into 2016 and beyond) being very imminent. I expect “phase 2” of the GFC, and I expect it to be worse than the Great Depression. It probably won’t be over till 2016 or beyond. That’s what I think is most likely anyway.

    So… over the past few years I’ve dug around a little bit more in the Super world. In the process of that research, I realised that the “cash” option bears a misleading name. It really means “continually employed in speculation on the short term money market”. Well that’s what it means for my current fund (Australian Super) anyway. It *doesn’t* mean “cash stored in a bank vault”, for example. At the moment, of course, such speculation is relatively very low risk – but what about down the road?

    Now part of my long term forecast for the global economy includes the distinct possibility for a breakdown in the debt markets to a greater extent than in the first wave of the GFC. So I can’t help but be concerned that such disruptions could spread into the short-dated debt/bond market also. Under that scenario my super “cash” is at risk.

    I’ve dug around, and can find no super fund (unless I go the SMSF route) that allows me to allocate my super to vaulted physical cash (or gold) – all the super fund “cash” options are really short-term-money-market speculation.

    Am I correct? Is there no super fund with an allocation option that does not involve speculation in some market or another?

    John

    • John and Mark:

      The caveat (isn’t there always one) with investing in cash in non-self managed super is the fact that most of them (I’ve not looked at ALL of the funds) do as John says – they invest in short term money market funds, which have much lower rates of return than the standard, retail term deposit. So around 3-4%

      e.g if you had a SMSF, you could go to UBank and get an at call account for 6.3% or 12 month TD at 6.2% (Disclosure – I have a Ubank account, but just for my savings. Great service btw – very strange to speak to a real person……)

      I’ll have a bit of a closer look at the top 10 cash funds I mentioned above via SuperRatings.

      I’ll update the post when I do so.

      For similar reasons, I am wary of the “fixed investment” choices in most funds – a closer look reveals a lot of “investment” in emerging market bonds and EU bonds….eep

      I’ll be getting into quite a lot of detail about this in my asset allocation article.

      As for timing, I call it luck, but we put all our super into cash in August 2007. Its still 60% or so cash (at call)

    • I am also with Australian Super. Great to know that little tidbit of info. Does this mean that the fixed interest allocation might be better within this fund?

      • mentasm,

        From recall – the “fixed interest” allocation is in longer dated bonds and can be a mix of foreign, Aus federal, Aus state and corporate bonds.

        I say “longer dated” as compared with the deceptively named “cash” allocation, which means allocation to very short term (overnight to a few days) debt market.

        If another round of the GFC develops, the longer dated debt/bonds will run a much greater default risk than overnight debt.

        Cheers

        • Thanks for that.

          I’ll just wait for the next article in this series and see what I think.

    • My fund, EnergySuper, offer a cash deposit option, with funds held in ADIs.

      I’m primarily in cash enhanced but will reconsider following the rest of your articles, thank you Prince.

      As Gen Y I have serious doubts about having any super when I am finally allowed to retire. I think my best investment is broadening my own skill-set.

      • Booyah!

        Thankyou Gianni.

        Thats great to know. Long live the blogosphere.

        I will check it out and most probably move my funds from AustralianSuper.

        I’m still looking for the ‘holy grail’ of safe (as possible) super, though – one that offers an allocation entirely in shorter dated Australian Federal Government bonds – because I think the chance that some Australian Depository Institutions find their finances upside down as the next wave of the GFC kicks in is not insignificant (and therefore rendering an ADI allocation more risky than I’d prefer).

        If anyone knows of a super fund that will do this, please let me and the world know.

    • i THINK (can’t remember exactly, sorry) that the Colonial First State cash option i had, under my own name (ie. not a “collective” account) was a true cash option…or at least that’s the impression i got…had a given interest rate and all…

      But I have moved to SMSF October last year.

  6. Great article.

    I am awaiting your following articles with bated breath.

    Also Thank you to Bamboozled for asking exactly the questiopn I wanted to ask. I am in a very similar position and am looking for some solid information to help me make good choices.

  7. Just a comment re cash in super, the current overnight rate is 4.75% take out 15% tax on earnings, you are left with 4% return, take out management fee of between 0.3 to 1.00 and your return is between 3 and 3.70%.

    My view, is that as an alternative to SMSF, is the use of wraps, where you can invest in term deposits or direct shares as well as managed funds. term deposits are achieving 6% for 180 days, market rates are coming down to 5.80% for 12 months. Issue is that most are designed for account balances in excess of $150k and have average admin costs between 0.7 and 1.3.

    Use of public sector retail funds such as FSS offer low cost at approx 0.3 to 0.5, and work well for small balances less than 50k.
    Other considerations such as some corparate funds also offer automatic acceptance regarding life cover regardless of health and should not be discounted.
    I am wary of SMSF’s re the fact that they are not protected regarding fraud. A number of retirees that were convinced that SMSF were the way to go have lost larges amounts in TRIO/ Asstara,and cannot get compensated whereas as retail funds are covered by Paul Keatings levy.
    I have also heard anecedotely that large volumes of gearing residential investment property have occurred since the gearing rules were relaxed. Some food for thought.

    This comment is not to be taken as investment or general advice. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

  8. “I’ll have a bit of a closer look at the top 10 cash funds I mentioned above via SuperRatings”

    Please do!

    Brilliant article!

  9. Well you could always set up a SMSF and invest in Term Deposits or for my clients I access bank term deposits on our platform (there are fees to use the service though) which is a very transparent strategy.

    That is more important to me athan using an industry fund with ‘cheaper’ fees invested into an unknown asset.

    You have to have confidence that the whole system isn’t going to blow though or even your TD may be in trouble.

  10. The other issue to always remember is the frequency of valuations re assets such as unlisted infrastructure and property. Some notable industry funds such as MTAA had stellar performance during the height of the GFC only to have stellar underperformance when there assets were rewritten.

  11. One of the pertinent questions to ask is what the average equities return is for commercial super funds. Given their sizes, the math says they can’t average higher than the market. Once you remove their fees, the average fund return will always be less than the market. One fund may outperform for a few years, but given your working life is 40+ years then I’d say even today’s best performing fund will only give less-than-market returns in the long run (they’re only as good as their people, who are transient over a 40 year time frame). Unless you watch your fund like a hawk and are prepared to move to chase better performance, equities performance may not be much better than cash.
    Anyone know any decent studies which would give a reasonable estimate of a funds after-tax return when investing in equities?

    • From my funds management post:

      according to APRA’s latest Annual Superannuation Bulletin (released in January), the Rate of Return (ROR) for all super funds that are not self-managed has been 8.9% for the financial year to June 2010. This compares to a 9.4% increase in the S&P/ASX200 Index.

      More importantly, the average annual ROR over the last 10 years has been 3.3% – or 2.5% p.a for the retail subset.

      Then theres this: latest Standard and Poors (S&P) Indices Versus Active Funds Scorecard (SPIVA(R)), bhttp://www.standardandpoors.com/indices/spiva/en/us

      • Does ROR refer to the return to members taking into account fees (incl contribution fees)? Or is it simply the rate of growth of the funds in that investment out of which fees will be subtracted and which fees have already been extracted through contribution fees?

  12. Good Article prince, what I am interested in is the degree of political appointments to the boards of the government funds and the impact on asset allocation. I believe that MSBS which is the military fund has had a number of Unionist’s appointed to the board, which is particulary weird given that the defence force is non unionised.This adds credence to Bill Shorten’s comments as well.
    I have always been way of CBUS given it construction industry bias.

  13. For anyone interested, I highly recommend Buffett’s tale of ‘the Gotrocks family’ in the 2005 Berkshire Annual Report;

    “… A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).”

  14. Thanks for this information, very much in my thinking!

    I’m a “Gen X” with a bit over 50K looking at setting up a SMSF as the returns and impending world instability doesn’t guarantee returns as they did pre GFC. The bank cash rate of 6.3% seems like the best option currently for this amount of money. I was somewhat daunted by the prospect of setting up a SMSF until a comment was made re UBank with a SMSF option returning 6.3% pa.

    Are there any issues re choosing such an option in relation to gains missed, and are there any gotchas by subscribing to a simple SMSF as for example through UBank??

    • Aidee – excellent question. Short answer is its relatively easy to set a SMSF up and place the majority if not all of the funds into a term deposit.

      The long answer is, could I use your example to write a post on this very issue?

      • Yup happy to act as an example and if you’d like a history of my super, self-selected choices and the mediocre returns of such leading to exploring SMSF then i’d be more than willing 🙂 Contact me offline if need be.

    • I work in the finance industry and I would recommend you consider the Colonial First State Whoelsale Super Account. It is currently paying 5% per annum on the cash account. NO FEES. You can lock away some of the funds in term deposits. A 1 year TD is payiong 5.6% NO FEES.

      Read the PDS and their website, this info is 100% correct.

      However if you setup a SMSF with a $50,000 balance, you would have fees of approximately $2,000 per annum ongoing. As such, you TD inside a SMSF would have to earn 4% per annum more than using Colonial, so your SMSf would have to earn 9% on the cash fund, just to break even.

      SMSF’s are promoted by planners and accountants to lock you into much higher fee paying arrangements, where they can generate a much larger cashflow than on basic tax returns.

      • The UBank/Colonial options seem more and more the way to go… One always has to account for the fees involved regarding a SMSF versus done with a packaged bank option as suggested. Thanks for the advice!

        One question is whether such accounts are government guaranteed; in case the NAB falls over… I assume they would be but would need to read a PDS.

        • From memory the UBank account is guaranteed. I know someone who uses it and I am sure they said it was.

          Colonial on the other hand, I am not sure at all. Send each of them a quick email and they should be able to let you know.

      • I half agree with you Adrian – those returns are pretty good without fees and make sense for people with small super balances.

        However, you are wrong about the $2000 level – this is a myth promoted by the financial planning industry because it doesnt suit their asset based fee business structure. But you are quite right, accountants love SMSF clients – its super easy work….pun intended.

        I and plenty of other people have set up run and manage their super for less than $800 a year, from balances from $20,000 to $100,000

        A Ubank TD at 6.2% on $50,000 earns $3100. Subtract $180 ATO fee and $600 audit fee (I use ESUPERFUND) and you get a 4.6% return, before tax, so yes, less than the CFS product.

        But if you are earning say $80,000 a year, with 9% SG contributions of $7200, the total fixed cost of running the fund drops dramatically (your fund is growing at nearly 15% per annum, but your fees are static), and you have the instant versatility of changing your asset allocation (or starting to develop a small hedge).

        So yes, for small balances, the CFS option looks ok – but I would check the guaranteed bank deposit rule – because I know the UBank product is guaranteed (as its a retail level ADI deposit taking institution less than the maximum limit).

      • I pay $700/yr on my SMSF: that’s about my total costs for the year, which INCLUDES the $150 SMSF audit fee…

        Hence, $2000 is more for smaller accountants, etc, that do not have the size to “go on volume”, as some large, specialised SMSF accountancies do…

        My 2c.

    • Thanks for the link Karlos – I’ll check it out (tear it apart) when I post on SMSF for Gen X/Y

      I guess getting double digit absolute returns since the GFC with my SMSF starting below 200K is sheer nonsense.

      unfortunately, voices like him have power when it comes to regulators – there’s even a push for SMSF trustees to get “qualifications” before being ALLOWED to run their own funds….

      I’ll have “protected industry” for $500 thanks Alex.

      • Sounds good – I look forward to your next post. I am a 30 something who is trying to get my financial future in order… It is very helpful to read your posts and comments by readers.

        I am considering a financial planner but would prefer to do things myself considering that a cohesive financial plan can set you back 2,000-10,000 apparently.

      • Sounds good – I look forward to your next post. I am a 30 something who is trying to get my financial future in order… It is very helpful to read your posts and comments by readers.

        I am considering a financial planner but would prefer to do things myself considering that a cohesive financial plan can set you back 2,000-10,000 apparently.

  15. Many people say “Australia has the best retirement system in the world” – and the gullible Australian public keep lapping it up.

    Which begs the question – if our system is good, why have so few countries chosen to imitate it?

    Could the emperor indeed have no clothes?

  16. Prince,

    re: SMSF < $50,000

    I have my SMSF accountancy with eSuperFund, and they're only some ~$700/yr, everything done, everything else centralised with them (trading platform, bank accounts, etc).

    That's my only expense and i only have ~$35K to work with.

    My point is that SMSF need not be relatively expensive nor burdensome to run – you just need to choose the right admin mob.

    At least that has been my experience.

    Aside from writing a few Director's Minutes with my wife, i've hardly lifted a finger since setting up the Fund (which, admittedly, does take a lot of work…mind you, mobs like EsuperFund send you templates to fill out anyway, so it's not too hard even then!)

    My 2c

  17. As some other posters have pointed out, I think you’ve unfairly presented the performance of equities versus cash. If equities *average* 8% over the long-term – which I agree is debatable! – then that includes the effects of 10% crashes. And the distinction between “mark-to-market” and “actualisation” is moot for most super funds, which have a steady inflow of funds larger than their outflow (this may change with demographics).

    I also think someone with a small super balance who is young and continuing to pay significant amounts into super is in a good position to ride out and/or take advantage of any market corrections, and should therefore have their super slanted towards “growth”. It’s as people get older and closer to retirement that they should be moving their super into more defensive options.

    That said, I’m sufficiently nervous about markets at the moment that my super is in a fixed interest option.

  18. Very interesting, and thought prevoking, interesting thread of comments as well.
    The SMSF sector is regarded as the fastest growing sector of the super sectors as people get the feeling they can out perform the mainstream super managers. The history of returns lodged with the ato seems to suggest that is correct.
    The downside is the legislation that surroiunds these funds. for instance why can CBUS invest in a trading / propertyt development business (I think 100% owned by CBUS) which is geared and runs a business but a SMSF can’t really even improve an asset without falling foul of the rules.
    Gearing in a SMSF has been a moving beast over the last 12 years, but if you do an analysis the bulk of funds that used gearing over the last 20 years have out performed (esp those that had a commercial property attached to the business they where running)
    re fees. (I used to run SMSF accounts and in 2002 I billed a smsf $17,200 for a set of accounts and audit was another $5500 on top … the SMSF did have $72m in it and around 70 assets)

  19. Great post.
    And am in the same boat of 30-somethings considering what to do with their super. Am also getting to that level of financial literacy where I’m quite likely to think I know more than I do and make some poor investment decisions.

    Anyway, after doing an economics assignment into Super funds and consolidation in the industry, it certainly surprised me to see the rapid growth in SMSFs. But when you considered that they tended to perform better and fee structures, then it started to make sense. I’d had always assumed that for me it would be “later once I’ve got more money in the super account”.

    What did emerge from my research was that there is a tendency for most people to think that the 9% contribution will be sufficient for retirement. When in many cases it won’t be. Hence, my first reaction was to start salary sacrificing. Then after some further reading, I realised that having money locked away in super wouldn’t be a great idea if I was thinking about taking out a home loan within the next 10 years and paying debt would be a better ‘investment’.

    With regards the comments about having an SMSF for small accounts. After a quick look through my Annual Statements with VicSuper (I have only one super account), I struggle to see how at this stage with a relatively small account ($25,000) it would be worth switching to a SMSF. Current managements fees on VicSuper is 0.5% (~$125/year), so if the SMSF fees quoted by others above are ~$700/year, then unless I’m missing something that difference would have to be made up in superior performance via the SMSF. Which is perhaps the argument some wish to make, but surely, you’d be better off waiting until your account is higher as the Prince suggests?

    Having said all that, VicSuper’s cash account is on the past 5 year’s performance (unsurprisingly), better than the alternative VicSuper investment options. So i’ve switched some of my account across.

    +1 to the book idea too. Although, perhaps a blog post series would be more up to date anyway. Having said that John Quiggin seemed to write his Zombie book via blog posts and essentially had a “crowdsourced” editor/fact checker/story supplier along the way.

    m

  20. SuperBamboozled

    Brillian stuff Prince, also eagerly awaiting the SMSF posts. It’s also been good to see that I am not the only GenXer that is tackling these issues…. really enjoying the debate!