- SMSFs: How do you work out the cost of running your fund?
- How do you compare the costs of different SMSF service providers?
- So, how much should a DIY super fund cost?
- Does size matter for SMSF running costs?
- What is the minimum cost-effective balance* for an SMSF?
Note: Article updated in February 2017, and includes an extra table outlining fees for small and large SMSF account balances. This article includes the latest SMSF cost data released in December 2016 by the ATO, and selected cost data released by ASIC in September 2013. The next SMSF cost update is expected to be released by the ATO in December 2017.
Q: My wife and I are considering setting up a self-managed super fund. I asked two advisers for a quote on the set-up costs for a self-managed super fund with a starting balance of $600,000. The first adviser charges approximately $8000; the second considerably less — about $1500. Which do you think would be the better option, and fundamentally, is an SMSF the most cost-effective option for a couple with this level of savings?
A: You ask 2 questions: which adviser quote is the best option, and whether an SMSF is the most cost-effective super option for you?
I have structured my response into four sections:
- How do I calculate my SMSF fees?
- How do you compare the costs of different SMSF service providers?
- How much should an SMSF fund cost (including 2 tables that list average costs, and average costs for different account balance sizes)?
- What is the minimum cost-effective balance for an SMSF?
SMSFs: How do you work out the cost of running your fund?
Based on the information that you have provided, an $8000 fee for advice on $600,000 in assets (assuming all of these assets move into your super fund) works out to be 1.3% of your fund’s assets but I’m guessing that the fee quoted involves set-up costs, annual running costs and perhaps a general financial plan.
For your comparison, according to the latest ATO report on SMSFs, the average operating expense ratio for SMSFs is 1.10% (and note that works out to be $12,200 (!) for the average fund balance of $1,12 million, based on figures recorded in the ATO report). A more helpful comparison is to look at the average cost of a SMSF for a fund of your size.
Note: The operating expense ratio is simply dividing the costs of running a SMSF by the value of the fund assets.
On a $600,000 account balance, an expense ratio of 1% means $6,000 in annual fees. An operating expense ratio (OER) of 0.25% on a $600,000 account balance works out to be $1500 in annual fees, although such a low expense ratio is associated with much higher account balances (according to the ATO, an 0.25% OER is lower than the average OER for a SMSF of any fund balance size, although that statistic does not mean that individual SMSFs can’t secure lower OERs, as the bullet list below confirms).
Note that the average OERs quoted by the ATO in its latest report (Statistical overview 2014-2015, released in December 2016) have increased markedly since the ato’S 2012 report, due to new data on the non-deductible expenses incurred by SMSFs, especially those SMSFs in pension phase. According to the ATO, the average OER continues to decline in direct proportion to the increase in the size of the SMSF.
The following ATO statistics may be helpful:
- SMSFs with fund balances of between $500,000 and $1 million have an average OER of 1.43%, which works out to be $8,580 on a fund balance of $600,000.
- Nearly half (45.7%) of all SMSFs have an estimated OER of 1% or less
- Just under two-thirds (59.7%) of SMSFs have an estimated OER of 1.5% or less.
- 3% of SMSFs have an OER of one half of one per cent or less, with 12.6% of SMSFs having an OER of one quarter of one per cent (0.25%) or less, and 13.7% of SMSFs having an OER of between 0.5% and 0.25%.
I detail the actual costs of running a SMSF later in this response.
How do you compare the costs of different SMSF service providers?
The question you ask is an important one for anyone considering a SMSF. The difference in quotes is huge, but which service is the better option really depends on what you get for your money. Ask each adviser to itemise the following:
- Advice component (if any).
- Establishment costs (including trust deed).
- Running costs, such as administration, reporting (including annual audit), ATO supervisory levy and lodgement.
- Any other costs that are included in the quoted fee.
- Any other costs that may arise that are not included in the fee.
You can then compare which adviser is the most cost-effective, but cost is only one factor when selecting an adviser and/or an SMSF service. You can check out the total average cost of a SMSF later in this article, and compare your fund’s total costs to this average. The costs of set-up are not included in the annual running costs set out below.
I outline the costs of setting up a SMSF, and also the annual and one-off costs you can expect from operating a SMSF in my book DIY Super For Dummies, 3rd edition (published in 2015, Wiley). Briefly, the start-up costs for a SMSF can range from being free (with ongoing financial strings attached) to up to $2,200, although typically the start-up costs for most SMSFs cost somewhere in between these two figures.
Note: If you want a corporate trustee, then you need to add another $880 to $1,100 to your SMSF start-up costs.
So, how much should a DIY super fund cost?
The cost of setting up a SMSF is not the only key information you need to investigate. The annual running costs of your SMSF are more important to the long-term viability of your SMSF than the set-up costs, and will have a greater impact on your investment returns and the size of your superannuation account over time.
The average operating expense ratio (OER, which is calculated by dividing the costs of running a SMSF by the value of the fund assets) had declined over time up to 2012, with an average annual OER of 0.66% over the 4 years to 2012 according to the ATO. For the 2013 year however the average OER increased to 1.03%, due to new data collection on non-deductible expenses, from the 2012/2013 year onwards. For the 2014 year, the average OER rose to 1.06%, based on ATO figures. For the 2015 year, the average OER rose to 1.1%.
Update: In December 2016, the ATO revised the OERs for earlier years as follows: for 2011 year now 0.63% (up from 0.56%), for 2012 year now 0.67% (up from 0.56%), for 2013 year now 1.06% (up from 1.03%), and for 2014 year now 1.10% (up from 1.06%). The revised OERs have been included in Table 1 below. For verification of old and new OERs, see the following ATO reports:
- Self-managed superannuation funds: A statistical overview 2014-15 (released in December 2016)
- Self-managed superannuation funds: A statistical overview 2013-14 (released in December 2015)
Table 1 below outlines the average costs for an average SMSF balance. Note that the annual cost of a SMSF is dependent on the value of the fund assets because many SMSF costs are fixed costs, such as fund audit, preparation of accounts and the ATO supervisory levy. Also, the average fund balance (see table below) is reasonably high which means the fixed costs are spread over a larger value of assets.
Table 2 later in the article below outlines the average costs for different account balances, based on data from the 2014-15 year (released in December 2016). You can check your SMSF’s annual fees against this table to assess whether your fund’s costs are above or below average.
Table 1: SMSFs – Average operating expense ratio
|Financial year||Average fund balance ($)*||Average operating expense ($)||Average operating expense ratio (%)|
Source: Extracted from ATO reports, ‘SMSFs: A statistical overview 2008-09’ and ‘SMSFs: A statistical overview 2009-10’, ‘SMSFs: A statistical overview 2010-11’, ‘SMSFs: A statistical overview 2011-12’, ‘SMSFs: A statistical overview 2012-13’, SMSFs: A statistical overview 2013-14’, and ‘SMSFs: A statistical overview 2014-15’.
*The average fund balance has been calculated by SuperGuide using the average operating expense figures and expense ratios, and the balances are rounded to the nearest $1000, or $100.
Does size matter for SMSF running costs?
Yes! How much super you have in your SMSF can make a significant difference to the cost of running an SMSF because there are many fixed costs associated with an SMSF that remain constant whether you have $100,000 in super or $1 million in super. Typical fixed costs are the ATO supervisory levy, audit fees (although this fee can vary on size and complexity of the fund), and accounting and ATO lodgement costs. Larger SMSFs can benefit from economies of scale in terms of variable costs such as negotiating more competitive investment fees, for example, when buying and selling shares, and accessing investment products with lower ongoing fees.
In Table 2 below you can see the average costs for different account balances, based on data from the 2014-15 year (released in December 2016). You can check your SMSF’s annual fees against this table to assess whether your fund’s costs are above or below average.
Qualification: Having studied SMSF costs, and the costs of large funds for many years, I am a little sceptical of the average operating expense ratios for SMSFs with small balances (up to $200,000), and concerned that the OER for all SMSF balances is overstated, and may also include life insurance premiums. In some instances, I question whether they are complete: for example, on average, a $1 million SMSF costs less to run ($14,300) than a $500,000 fund ($14,400). Even with my concerns, the table below provides an indication of the costs involved
Looking at the OER for each account balance range, I offer the following comments:
- SMSF account balances of $100,000 or less: If you have a small SMSF fund balance, then you can expect to devote a higher percentage of your fund assets to annual expenses. For example, a SMSF with $50,000 or less in fund assets, has an average operating expense ratio of 12.55% (equates to costs of up to $6,275!) according to the ATO’s statistical overview for the 2014-15 year. While the cost of a SMSF with $100,000 fund balance (6.47% of $100,000) works out to be $6,470, see Table 2 below). I am sceptical of the cost analysis for SMSFs with lower account balances for two reasons. One, I do not believe any decent service provider would charge upwards of 10% for such a small account balance. And if they are doing so, I cannot understand why the ASIC (in conjunction with the ATO) is not seriously investigating the fees charged by service providers where a SMSF has to generate 12.55% in investment returns just to cover fees.
- SMSF account balances of between $100,000 and $200,000: The ATO also reports that if you have between $100,000 and $200,000 in your SMSF, then the average expense ratio for such an SMSF is 5.66% ($5,660 on a $100,000 balance, to $11,320 on a $200,000 balance). Note that I am aware of many SMSFs with roughly $200,000 of assets within a SMSF who manage to keep total costs to about $2,000 to $2,500 (or 1% to 1.25% of fund assets); although with recent increases in the ATO supervisory levy and increases in audit fees, achieving such cost management at this fund asset level is becoming increasingly rare. Even so, I cannot understand why ASIC (in conjunction with the ATO) is not investigating a $200,000 SMSF being charged upwards of $10,000 in fees, unless the amount includes other expenses, such as life insurance premiums.
- SMSF account balances of between $200,000 and $500,000: If you have a SMSF with a fund balance of between $200,000 and $500,000 then the average expense ratio for such a SMSF is 2.84% ($5,760 on a $200,000 balance, to $14,400 on a $500,000 balance), according to the ATO.
- SMSF account balances of between $500,000 and $1 million: If you have a SMSF with a fund balance of between $500,000 and $1 million then the average expense ratio for such a SMSF is 1.43% ($7,150 on a $500,000 balance, to $14,300 on a $1 million balance), according to the ATO.
- SMSF account balances of between $1 million and $2 million: If you have a SMSF with a fund balance of between $1 million and $2 million then the average expense ratio for such a SMSF is 0.96% ($9,600 on a $1 million balance, to $19,200 on a $2 million balance), according to the ATO.
- SMSF account balances of $2 million or more: If you have a large SMSF fund balance, say, $2 million, then your expense ratio will be a lot lower than the average. According to earlier ATO statistics, SMSFs with more than $2 million in assets had operating expense ratios of 0.47% (2006), 0.43% (2007), 0.39% (2008), 0.35% (2009), 0.30% (2010), 0.27% (2011), and 0.29% (2012), and 0.60% (2013). For the 2013 year, SMSFs with account balances of $2 million or more have a higher average expense ratio of 0.60%, due the ATO taking into account expenses that were not tax-deductible. For the 2014 year, SMSFs with account balances of $2 million or more had an average OER of 0.63%, which translated to $12,600 on a $2 million balance. For the 2015 year, the average OER on a $2 million SMSF balance was 0.62%, or $12,400.
Table 2: SMSFs – 2014 average operating expense ratio for different account balances
|Fund size||Average operating expense ratio (%)*||Average operating expense ($)|
|$1-$50,000||12.05%||Up to $6,025|
|$50,001- $100,000||5.99%||$2,995 to $5,990|
|$100,001 – $200,000||4.86%||$4,860 to $9,720|
|$200,001 -$500,000||2.54%||$5,080 to $12,700|
|$500,001 – $1 million||1.35%||$6,750 to $13,500|
|$1,000,001 – $2 million||0.91%||$9,100 to $18,200|
|$2,000,001 and higher||0.63%||$12,600 and higher|
Source: Extracted from ATO reports, ‘SMSFs: A statistical overview 2008-09’ and ‘SMSFs: A statistical overview 2009-10’, ‘SMSFs: A statistical overview 2010-11’, ‘SMSFs: A statistical overview 2011-12’, ‘SMSFs: A statistical overview 2012-13’, ‘SMSFs: A statistical overview 2013-14’, ‘SMSFs: A statistical overview: 2014-15’.
*The average operating expense dollar amount has been calculated by SuperGuide using the differing account balances and the relevant average operating expense ratios, reported by the ATO. At the SMSF balances up to $1 million, SuperGuide is sceptical of the cost amounts quoted.
What is the minimum cost-effective balance* for an SMSF?
You also ask the question: is an SMSF the most cost-effective option?
In September 2013, the Australian Securities and Investments Commission published a consultation paper (Consultation Paper 216) considering specific disclosure requirements when advisers are providing advice on SMSFs, including SMSF costs. As part of the process, ASIC commissioned Rice Warner to examine the minimum cost-effective balance for SMSFs compared with large super funds (which are regulated by the Australian Prudential Regulation Authority). Some interesting points from the Rice Warner report, Costs of Operating SMSFs (May 2013), include:
- Less than $100,000. SMSFs with fund balances of less than $100,000 were not cost-effective in comparison to a large super fund, unless the SMSF could grow within a reasonable time.
- Between $100,000 and $200,000. SMSFs with fund balances between $100,000 and $200,000 can be competitive with the more expensive type of large super funds (typically retail funds), but only if the SMSF trustees undertake some of the administration and investment functions themselves.
- More than $200,000*. SMSFs with fund balances of $200,000 or more, are competitive with both cheaper and more expensive large funds, provided the SMSF trustees undertake some of the administration.
- More than $250,000*. SMSFs with fund balances of $250,000 or more are the cheapest alternative compared with all types of super funds, provided the SMSF trustees do some of the fund’s administration.
- More than $500,000*. If SMSF trustees require full service from SMSF administrators, then a fund balance of $500,000 is needed to be more cost-effective than a large super fund.
- Pension funds. The cost analysis is transferable to SMSF pension funds. A SMSF in pension phase is more expensive to run, but so is a pension account in a large super fund.
*According to the Rice Warner report, account balances larger than $200,000 are competitive with larger super funds, subject to some qualification.
For more information on SMSF costs, and minimum cost-effective balances see SuperGuide article, SMSFs: Enough super to justify SMSF running costs?