Should you join the hordes of people setting up their own superannuation funds?
Almost 1 million people now have their own funds, with annual growth in the number of do-it-yourself funds running at about 8 per cent.
More members of large funds are striking out on their own, mainly because they want more control over how their retirement savings are invested, and because of disillusionment about the poor performances of large funds.
For many people, especially higher-income earners and those with their own businesses, running their own funds can make a lot of sense.
But they are not for everyone. Those with small account balances and those not prepared to put in plenty of time and effort are probably going to be better off sticking with a large fund with low costs and cheap life insurance.
And although the returns of large superannuation funds have been poor since the onset of the global financial crisis five years ago, they are improving. Over 2012, the typical balanced investment option, where most people have their retirement savings, produced a return of more than 10 per cent. There is every chance returns will be good again this year.
Large funds have the benefits of their scale, with the best having fees as low as 1 per cent of the money invested, although some large funds can be expensive. Those running their own funds with assets in the fund of less than about $500,000 would be hard-pressed to have costs of 1 per cent.
The reason for the poor performances of large funds and the cause of the recent turnaround in performance is that the typical balanced option has about half the money invested in Australian and international shares. That makes the performance of shares the most important driver of returns.
Anyone with higher exposures to interest-paying investments such as term deposits, fixed interest and cash over the past five years would have done much better than the balanced options and their big tilts to shares.
A superannuation fund's balanced option is designed to give the best outcome over the long term for the majority of the fund's members. Most fund members are in their fund's balanced option because this is the type of option that most employers have as the default option for their new employees. And most new employees do not choose who manages their super.
No other investment can produce as good a return as shares over the long term. While a large exposure to shares benefits the majority of members over the long term, it leaves members with not that much time left in the workforce exposed to sharemarket corrections.
But large funds have a range of investment options with differing mixes of assets. Some are more conservative with higher weightings to interest-paying investments where the capital is stable, or fairly stable, even when share prices are falling. Most fund members are free to switch to another of their superannuation funds' investment options or to another superannuation fund altogether.