Will You Switch to a Self-Managed Super Fund?

When one of the Labor Party’s own tells you there’s ‘rotten apples’ in the industry superannuation barrel, you instinctively know that when the lid is lifted the stench must be putrid.

Take a look at this quote from Michael Costa, former NSW Treasurer (the emphasis is mine):

The royal commission (into trade union governance and corruption) has exposed some massive problems … I think the most important is the governance of industry (superannuation) funds.

There’s billions of dollars in these funds and they are badly managed in terms of corporate governance. The rorts that are going on there are horrific and they need to be dealt with.

Tens of thousands of Australians have already opted for their retirement money to be self managed rather than union managed.

In theory, industry superannuation funds are ‘not-for-profit. The ‘not-for-profit’slogan is designed to give the impression industry funds are run ‘on the smell of an oily rag’ compared to the greedy big-end-of-town superannuation funds.

In reality, you pay the fund executives, board members, asset allocation advice providers, administrative services, etc., leaving almost no profits.

Australia’s superannuation funds have some of the highest operating costs among the Organisation for Economic Cooperation and Development’s member countries,’ said David Murray’s interim report into the financial system released July 2014.

The Murray report confirmed what many Australians already suspected — they’ve been paying ‘well over the odds’ to the institutional and industry funds managing their retirement savings.

Judith Sloan had an excellent article in the Weekend Australian titled ‘Great for unions, not super for members’. This article is a must read for all industry fund members. The following extract sums the article:

‘The bottom line is this: the industry super funds have been a great boon to the union movement and the Labor Party alike.

They provide well-paid jobs for former union officials, paid trustee gigs for current union officials and lucrative business opportunities for entrepreneurial insiders. They are the source, both direct and indirect, of substantial donations to the Labor Party.

Not-for-profit. Bah, humbug.

Industry super funds manage approximately $400 billion. Just clipping the ticket by a mere 0.1% would generate $400 million in fees. We are talking serious money.

That’s money, if it’s being spent on unnecessary overhead, that could be put back into member accounts.

This is why the Financial Services Inquiry (FSI) report released on Sunday contained the following recommendations relating to superannuation:

  • Superannuation funds should be forced to tender for the right to manage hundreds of billions of dollars in default savings.
  • Super fund boards should be forced to appoint a majority of independent directors.
  • Trustees should be subject to the same penalties for misconduct as directors of managed investment schemes.

There was no great surprise when the Industry Fund spokesperson, in response, said (emphasis mine): ‘…industry super funds do not support the mandating of majority “independent directors” on the boards of super funds.

You can draw your own conclusions why the industry funds would be opposed to independent directors replacing their union appointed directors. If Joe Hockey endorses this recommendation , you’ll almost be able to hear the wheels of the gravy train grinding to a halt.

While industry and institutional funds are being dragged kicking and screaming into doing the right thing, the continual uptake of SMSFs is a clear indication members are voting with their feet.

According to data from the ATO, more than 520,000 SMSFs are now in operation.

ATO assistant commissioner for superannuation, Stuart Forsyth, recently told a Chartered Accountants conference:‘SMSFs are here to stay. We can see one million SMSFs down the track.

According to surveys of SMSF trustees, there are three major attractions to converting to a SMSF — control, flexibility and lower costs.

Being able to personalise the fund’s assets to suit your investment and retirement objectives is a huge reason SMSFs are gaining popularity over public offer funds.

Flexibility in investment selection enables trustees to act on the control they have.

And finally, costs.

The benchmark for setting up an SMSF used to be $300,000. Not so these days.

The lowest cost provider will establish an SMSF at NIL cost and administer the fund for $39 per month ($468 per annum). Note that there are conditions attached concerning which online bank and broker you can use.

Technology and competition are driving down the costs in the SMSF market. Members (single or combined with a partner) who have more than $60,000 can seriously investigate the pros and cons of an SMSF.

Let’s say a fund with $500,000 opts to use the online bank and broker of the lowest cost provider. The annual admin fee of $468 would be slightly less than 0.1 percent.

By comparison, a public offer fund with an all up cost structure (admin, trustee and investment fee) of 1% would be extracting $5,000 per annum in fees from their account.

I know whose pocket I’d rather have the difference going into.

Self managed or union managed? Unless you are a dyed-in-the-wool unionist or rusted-on Labor supporter who’s prepared to put the party before your retirement, then you should seriously look into taking control of your own future.

Vern Gowdie
for the Markets and Money Australia

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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