by Olivia Long

Question:
What is the minimum balance required to make an SMSF effective?

Answer: In short, there is no minimum for an SMSF to be an effective retirement savings vehicle. I know that’s not the view of the APRA-regulated funds, but I think it’s fair to say they are hardly objective when it comes to this issue. They argue that $500,000 should be the starting point, as well as arguing that potential trustees should be the font of all knowledge when it comes to investment and the regulatory environment. The concept of setting in stone qualifications for people wanting set up an SMSF has even been mooted. 

As you would expect, I couldn’t disagree more. My starting point is that cost is the wrong way to approach this issue. But even if you accept that cost of running an SMSF should be the guiding principle, then the argument that advocates a $500,000 minimum simply can’t be sustained.

Let’s have a look at some numbers produced by the actuarial firm Rice Warner. Taking a $100,000 balance, they estimated the average cost of running an industry fund, retail fund and SMSF at $936, $1608 and $1594, respectively.  So an SMSF is competitive already with a retail fund.

Increase the balance to $250,000 and the industry fund costs $2136, its retail counterpart is $4540, while an SMSF is $1750, 18% cheaper than the industry fund and a whopping 61% than its retail equivalent. At $500,000, the statistics are even more damming for the APRA funds, with the industry fund costing $4136, retail is $8940 and SMSF is just $1999.

On these numbers the figure of $500,000 is simply nonsensical; if you wanted a cut-off point based on cost then clearly it should be $250,000 compared with an industry fund and just $100,000 for a retail fund. Some “expert” just thought of a number and doubled it!

But to my way of thinking focussing on the cost of running a fund – important as it is – misses two critical elements to the debate. First, it often means there is a lack of analysis on the rate of return, surely a critical consideration for a long-term retirement savings vehicle. After all, if a fund’s rate of return is not important whey do our industry and retail counterparts trumpet their good years and give a good imitation of a Trappist monk in the bad years.

On the basis of return, SMSFs are competitive with the industry and retail funds. Over the past decade, retail funds have delivered, on average, 3.4%. I am quite certain many SMSF trustees have outperformed that average return.

Second, it tells those people – often younger people – that they don’t have the skill set or knowledge to take control of their own retirement savings. Surely in today’s society we should be encouraging people who want to take responsibility for their retirement to do so. Provided these people do their homework and have a full understanding of what’s involved in running a SMSF, then there is no reason to set an arbitrary limit to warn them off.

But don’t just take my word for it. In 2010, the Cooper Review, which took the last definitive look at our superannuation system, reached the same conclusion.