Why your SMSF needs at least $1 million to be viable


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Let's face it. Running a self-managed superannuation fund (SMSF) cheaply isn't easy. The average SMSF member is facing mounting costs with total annual investment and administration costs rising from around $5300 in 2013 to around $7200 in 2016 according to the ATO.

How much you need to hold in your SMSF to make it viable is one of the hotly debated questions in the superannuation industry. If you have too little, it is ridiculously expensive to run a SMSF and the costs drain any investment returns. You would be better off in a low-fee, high-performing industry super fund.

For many years investors were told that you could start up an SMSF with $200,000 as long as you were contributing heavily to it. Some experts recommended more like $300,000 or $400,000.

Why your SMSF needs $1 million to be viable

But according to the Productivity Commission's final report in the efficiency and competitiveness of superannuation funds, it pays to have more than $1 million in your SMSF. It is only when you reach $1 million, the Commission points out, that the costs become comparable with APRA-regulated funds.

productivity commission smsf self-managed super fund

What happens if you have less than $500,000 in assets in your SMSF?

"Costs for SMSFs under $500,000 in size are particularly high, on average, and significantly more so than for APRA-regulated funds," explains the Commission. It found that about 42% of all SMSFs (some 200,000 in 2016, with an estimated 380,000 members) have been under $500,000 in size for at least two years, and appear to persist with high average cost ratios and low average returns.

"Larger SMSFs have consistently delivered higher net returns over the five years to 2016, compared with smaller SMSFs," says the Commission.

"Over the same period, all but the largest SMSFs appear to have earned lower net returns than APRA-regulated funds, on average which returned 7.3% a year, compared with 6.0% for SMSFs. Expense ratios are the main driver of differences across SMSFs of different size brackets."

It found SMSF funds under $100,000 lost money over the four years from 2012-2016 while those SMSFs with $200,000 to $500,000 returned under 4%pa and those under $1 million earned around 5%. It compared the returns of new and established SMSFs over the four years with new SMSFs returning less because of the establishment costs that eat into returns.

However, this does not mean that all members in smaller SMSFs will be receiving poor returns, points out the Commission. It says some are earning high net returns or have tax advantages that are not fully reflected in the net returns data.

Some may also have been set up as part of broader strategies to manage members' financial risks, with regard to their assets outside of superannuation.

New SMSFs with very low balances (under $100,000) are falling according to the Commission from 35% new SMSFs in 2010 to 23% in 2016.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.
Richard Bulman
January 23, 2019 5.36pm

I don't know where this information comes from. I pay $895 per year including tax return, audit and all fees? Esuper is my provider.
I spend about 4 hours a year on administration. Just another example of the crooked people ripping off unsuspecting SMSF retirees.

jean gun sun hart
January 23, 2019 6.14pm

Wish I'd read your input 2 hours earlier! Just mailed application for Industrial Fund rolling over my Super around only $200,000. The way it's going, not much left in a few years in eWrap plus Financial Advisor fees. Jean

January 24, 2019 10.12pm

Jean, Richard is correct, check out esuperfund if you can, no setup fees usually and low ongoing fees, awesome platform. I use it myself and agree you dont need to pay high fees for a self managed super fund like this article suggests!

January 25, 2019 9.49pm

Yes but as I understand E. Super is unfortunately only for NEW funds, you can't rolliover your existing SMSF

Peter Ralph
January 26, 2019 11.14am

I've read some rubbish but this article takes the cake ... my SMSF has averaged a return of 18.8% per annum over the past eight years net of all expenses. I now exceed the sum mentioned but I didn't eight years ago ... and had I used an industry or retail fund I wouldn't have anything close to what I have. Poor article and does Money no credit.

Peter E
January 30, 2019 4.37pm

I also would disagree with this article. Upon retiring I placed $226K through an adviser with a large superfund. Over 9 years I paid out over $100K in various fees including Adviser costs. As fees were eroding my super savings I closed these accounts and in 2011 rolled over to a SMSF with e-Super which has a good platform, learning modules, and excellent backup for any related advice needed. Costs annually are just under $1000. I regularly research and monitor stock prices and the annual compliance requirements take a few days work so a SMSF is not for everyone. Knowledge of the super requirements is essential. My wife draws the minimum 5% pension and our SMSF continues to grow to the extent that we no longer receive a part Age Pension.

Dale Gillham
February 1, 2019 12.58pm

As someone with their own SMSF and who has taught many to manage their own portfolios, I can say that there is always another side to the story. I think the journalist has done a nice job with one side of the argument given the data they received, however there is not much detail on the research backing up the claims from the productivity commission and this makes it hard to assess the claims.

When deciding to run an SMSF it is a simple equation of fees V returns.

Anyone practicing a buy and hold strategy using just the top ten stocks on the market will achieve returns above what is quoted in the article, in fact they would most likely average over a ten year period returns in excess of 10%. Also as many people commenting here have said, the fees people are currently paying are 20% of what is quoted. I know my fees are a fraction of what is quoted. So if anyone with an SMSF achieved a 10% growth on their portfolio and paid 2% in fees, that is still equal to or better than an industry fund that are quoted to average 7.3%. Based on everyone's comments paying 2% in fees is quite achievable.

What pushes fees up are more transactions as this leads to more accounting and auditing fees, however this is quite manageable with the right approach to investing and the right administration services.

It is important to put things into perspective as the financial industry do not want anyone to manage their own money, and so they are always putting out data or skewing data that supports their view.

That said I do support the fact that not everyone is suited to having an SMSF, and some who do, are achieving very poor returns. That is an education issue as all trustees should not only understand what an SMSF is and the compliance required, but also how to properly invest through one.

What it is definitely not, is an issue with having an SMSF or how much funds should be in the SMSF, as I mentioned it is simply a return V cost scenario. An SMSF with $100K can perform very well, have low fees and out perform an industry fund.

But even more importantly than that it is a matter of freedom of choice. The more competition the finance industry has in this area the better as this keeps fees lower and so all Australians win.

March 12, 2019 4.45pm

Any data needs to be asked about its source, selection range and how the statistics were done. My super through an award winning industry super fund never grow like it supposes to and I did an analysis it across the 10 years, its average return is merely close to 5% and last quarter it even shows negative returns. How would a professional fund manager sell shares when the market was very low last year? This means super fund managers can make decisions based on their company benefits rather than the fund owners.