The true cost of running the average SMSF could be as high as $20,000 a year, according to Deakin University.
The “SMSFs: What is the real cost?” study said the preliminary findings dispelled the widely held belief do-it-yourself funds were the cheaper alternative to most other types of funds, Deakin University financial planning and superannuation senior lecturer Adrian Raftery said.
“When you factor in the value of the trustees’ time required to run the fund, we find that they are not so competitive,” Raftery, who co-authored the study, told the CPA Australia SMSF Conference in Sydney last week.
“These figures, between 1.45 per cent to 1.92 per cent [of the SMSF’s balance], are significantly more expensive than industry and public sector funds, while comparable with most retail superannuation funds.
“[SMSFs] definitely are not cheaper.”
Furthermore, the study found those with an SMSF spent on average an extra 40 hours a year on compliance and monitoring activities in relation to their retirement money compared to their Australian Prudential Regulation Authority-regulated counterparts, who spent eight hours a year.
“When we value their time spent based on the national minimum wage, currently $656 per week, we estimate that the average-sized SMSF costs $15,667 annually or 1.45 per cent of the average fund balance,” Raftery said.
“This increases to $20,687, or 1.92 per cent [of the fund’s assets], when we value their time at AWOTE (average weekly ordinary time earnings).
“These figures are obviously conservative for those earning higher-than-average incomes.”
The study demonstrated the cost and time involved in running an SMSF were significant and should be disclosed to the client, he said.
“Disclosure of costs, including the time involved, will help to ensure that clients are able to make an informed decision whether an SMSF structure is a suitable investment vehicle for their retirement monies,” he said.
While acknowledging larger funds did enjoy economies of scale, the perception SMSFs were cheaper to run was because SMSF trustees, under the Superannuation Industry (Supervision) Act, could not charge for their time, he said.
“Statistics from the ATO for the 2012/13 year indicate that the average operating expense ratio for SMSFs are 1.03 per cent of total assets, with the average cost of an accumulation fund being $9900, jumping to $10,600 in pension phase,” he said.
“However, these figures do not account for the value of the time that the trustees are required to spend on compliance and monitoring issues, from picking and reviewing investments through to bookkeeping and arranging the annual audit and tax return.”
The study surveyed 1142 superannuation fund members, comprised of 504 SMSFs and 638 non-SMSFs, where the average SMSF size was $1 million.