Five reasons to dump your DIY super fund
Monday, December 8, 2008/
The shine may have come off many initially well-intentioned DIY funds of late. For many such superannuants, there are solid reasons to consider a drastic change. By MICHAEL LAURENCE
By Michael Laurence
The shine may have come off many initially well-intentioned DIY funds of late. For many such superannuants, there are solid reasons to consider a drastic change.
Tens of thousands of people are holding on to DIY super funds that serve no purpose other than to earn fees for the professionals who do the administrative grunt and file their annual returns. Most of these funds should have been closed years ago.
This is suggested by the latest statistics released by the tax office, as regulator of self-managed super, showing that 31,600 DIY funds were established in the 12 months to June – but just 669 were closed.
In fact, the number of funds that close each year is probably because the members have died and there is no option other than closure.
The closure rate is particularly minuscule considering that DIY funds number more than 390,000.
Often DIY funds are established on a whim or perhaps with big ambitions that come to nothing. And new retirees are frequently persuaded to rollover their super from a large fund into a new DIY fund – although many would rather not spend some of their retirement looking after their own fund.
Given the severity of this bear market, any tolerance of a worthless DIY fund becomes even more incomprehensible. If a fund is unlikely to ever pay its way, the only smart course is to dump it.
By holding on to such a fund, chances are you are not only wasting the costs of running it but probably also the ability to make your capital really work.
Here are five reasons to close your DIY fund:
Your fund, of course, will almost certainly be producing negative returns through this bear market – unless it was not exposed to the sharemarket for much of the past 12 months. The key question is whether it has underperformed the big funds through recent bull and bear markets.
A valuable exercise is to check how your fund’s performance over the past five years compares with the median returns of the large super funds.
One straightforward way to do this is to call up the website of superannuation rating agency SuperRatings for the rolling annual returns for up to 10 years of the 25 to 50 largest funds in its performance surveys. (These returns are after-taxes and after investment management fees.)
Of course, the levels of taxes and fees paid by your DIY fund are most unlikely to be identical to those of the large super funds. But the fundamental value of such a comparison is that it shows the sorts of returns that your super savings could be getting in a large super fund.
The surveys from SuperRatings show the median returns of the large funds in specific asset sectors, such as shares as well as in pre-set diversified portfolios such as growth, high-growth and conservative balanced. The pre-set portfolio of interest to most people is the highly popular balanced one – classified by SuperRatings as having 60% to 76% of its portfolio in growth assets (mainly shares and property) with the remainder in defensive assets (bonds and cash).
Despite the horrific past 12 months, the median balanced portfolio of funds surveyed by SuperRatings returned 6.67% over the past five years to October. This is not exactly earth-shattering, but it is not a disaster.
Are the after-tax and after-fee returns of the large super funds a reasonable benchmark for a DIY fund? Unquestionably yes, say leading specialists in DIY funds and large funds.
Jeff Bresnahan, managing director of SuperRatings, says that self-managed funds are sold, in part, with the expectation that they can outperform the big funds.
“The returns of diversified balanced portfolios of the large funds should be the minimum for DIY funds to be measured against,” he says. And Bresnahan says that if DIY fund trustees don’t benchmark their funds’ performance “they are probably pulling the wool over their eyes”.
Bresnahan suspects that many DIY fund trustees set an initial portfolio for their funds and never change it.
Meg Heffron, co-principal of the self-managed super fund consultancy Heffron Consulting in NSW, agrees that the after-tax and after-fee returns of the big funds are a valuable means for DIY fund trustees to benchmark their investment advisers’ recommendations or their own investment decisions.
TWO. Death of most-active member
Superannuation lawyer Stephen Bourke, a director of Certus Law in Canberra, says the death of a member or members is usually the factor that closes a DIY fund.
As Bourke explains, husband-and-wife DIY funds, for instance, usually comprise what he calls an “active” member and a “sleeper” member. The active member, says Bourke, tends to make the decisions and obtain any investment advice – and the “sleeper member” signs whatever is put under their nose.
The death of a fund’s active member can often leave the surviving member of an even top-performing fund floundering – particularly if the sole surviving member is elderly.
“When the active member dies, the surviving member should take a long hard look at whether the DIY fund is still the right retirement vehicle,” Bourke says.
Victorian superannuation lawyer Dan Butler, managing director of DBA Butler Lawyers, says his firm often advises that an adult child join their parents’ DIY fund to overcome difficulties that can arise upon the death of the active member. But such a strategy can lead to complications such as if the adult child subsequently experiences a marriage breakdown.
Butler explains that while a child’s marriage breakdown would not place the parents’ super savings at risk, the decision to accept an adult child as a member should be carefully analysed. (See point three on marriage breakdown.)
Even the death of all members may not necessarily lead to the rapid closure of a DIY fund, says Peter Bobbin, a principal of Argyle Lawyers in Sydney and Melbourne.
Bobbin, a superannuation specialist, suspects there are what he calls “ghost funds” in existence where all of the members – perhaps a husband and wife, or a single member – have died. But the tax office, as regulator, may not find out about their deaths for three or four years in some circumstances. And in the meantime, dividends are electronically credited to the funds’ bank accounts.
THREE. Marriage breakdown
Stephen Bourke says a marriage breakdown is often the trigger for the “sleeper member” of a husband-and-wife fund to move their super savings into a large public-offer fund. And the active member would typically continue in the DIY fund.
Under amendments to the Family Law Act in recent years, superannuation savings of a separating couple are treated as property for the purposes of a property split.
A Sydney family law specialist says it is “extremely rare” for separating couples to remain in the same DIY fund after their property is settled. This lawyer adds that marriage breakdown can serve as a catalyst for both husband and wife to get out of DIY super. They sometimes decide that their savings would be better off in a large super fund. Divorce could lead to a hard look at how a DIY fund has been performing, the lawyer says.
FOUR. Insufficient time
Guiding a DIY fund can take plenty of time, even when the trustees use specialist fund administrators such as Super Concepts or Heffron Consulting, or perhaps an accountant to do much of the paperwork.
Dan Butler says many people establish DIY funds without envisaging the work involved. Sometimes they are “better to bite the bullet” and close their funds, he advises – but emphasises that it will not always be in their advisers’ interests for the funds to be closed.
FIVE. Failure to meet initial ambitions
Often DIY funds are established with the ambition that they will one day have large balances and directly hold such valuable assets as a commercial property. But in many instances that does not occur, and yet the funds are retained almost through habit.
Peter Bobbin of Argyle Lawyers believes that some DIY funds are established “almost as fashion statements” but then little attention is paid to them – other than paying fees for them to remain open. “Their members would be far better to get rid of their funds,” he says.
Bobbin suspects that a DIY fund that is not being given sufficient attention will almost certainly be in breach of some superannuation laws.
Bourke says people often establish a fund without really thinking about it. “This was not a good way to start,” he says.
And there is the basic problem that a DIY fund may not have enough money to be viable. Butler says such funds should obviously be closed.
When to close a fund
Typically, you should never close your fund at the beginning of a new financial year, because it will have to pay the expense of preparing the final regulatory and tax returns covering only a short time. Of course, an intended closure date should be set well in advance to give members enough time to carefully select and join other super funds.
The essential steps of a closing a DIY fund are:
- Write down the members’ decision to close their fund.
- Pay the fund’s outstanding liabilities and expenses.
- Gain written requests from members about how they want their super savings paid. This is not legally required but will reduce the likelihood of later disputes or misunderstandings.
- Distribute remaining assets to members. Generally, this will involve rolling the assets over to other super funds. (Some retired members may want their super savings as lump sums, and perhaps such fund assets as real estate or particular shares transferred into the retirees’ names.)
- Lodge the fund’s final regulatory and legal returns.
- Prepare to keep most fund records for 10 years.