For something so popular, self-managed superannuation has a terrible image.

With 400,000 DIY funds operating and new ones opening every day, you would think DIY super would be an accepted and respected part of the super market.

But the sector is still tainted with commentary that trustees of DIY funds don't know how to administer their funds properly, make poor investment choices, pay too much to run their funds and, at the extreme, set up self-managed funds to rort the system.

None of it is true, says Andrea Slattery, the chief executive of the Self-Managed Super Fund Professionals' Association of Australia (SPAA).

Slattery says big funds have tended to demonise the DIY sector and she wants to turn that around.

SPAA's position is that self-managed funds are not hard to run (if you follow the right procedures), do not lag other types of funds in terms of performance and are not expensive.

As more people leave their employer or industry or public offer funds, disenchanted with their performance over the past couple of years, Slattery says they have nothing to fear from setting up a self-managed fund.

Fees

First up, the fees. Slattery says a survey of super expense ratios prepared last year by actuary Rice Warner for the Investment and Financial Services Association shows DIY fund costs are competitive.

According to the survey, the average cost of running a DIY fund was 0.97 per cent of the assets in the fund, which is higher than corporate funds (at 0.89 per cent) and public offer funds (0.75 per cent) but less than industry funds (1.12 per cent) and a lot less than retail funds (2.1 per cent).

Rice Warner principal Michael Rice says his assumptions regarding self-managed funds included a financial planner fee of 0.5 per cent a year applying to the 20 per cent of DIY trustees who make use of an investment adviser. "It is a competitive cost structure, although you have to recognise that the range of fees is wider for the self-managed sector than for other types of funds," Rice says.

"Some people could end up paying a lot more." (See breakout below.)

Slattery says the available evidence suggests self-managed funds produce returns comparable with the investment performance of other funds.

She says figures prepared by the Australian Prudential Regulation Authority (APRA) comparing the performance of big funds and a category of funds called small APRA funds (a proxy for self-managed funds) shows self-managed beating other funds in all but two of the nine years up to 2005.

"There is a view that people who know nothing about investing start these funds and put all the money into a term deposit or a cash management fund," Slattery says.

"There is not a lot of available evidence but what we have tells us that the same sort of asset allocation process goes on in DIY that goes on in other funds and the returns are comparable with any other type of fund. Why wouldn't it be?

"Most of the people who start their own funds are qualified people on high incomes who are used to making decisions in their lives.

"You would expect them to do a good job investing their retirement savings."

Compliance

Administration is where a lot of people fall down because the process can be tedious and there are a lot of rules.

The executive director of Macquarie Adviser Services, David Shirlow, says the big difference between DIY and every other kind of super is that a person setting up a DIY fund takes on a dual role - as a member of the fund and as a trustee.

"You are responsible for the operation of the fund," Shirlow says. "You might discharge that with the assistance of various professionals but you are the one with ultimate responsibility. You have got to have the time and the skill to take that on."

The technical research analyst at Centric Wealth Advisers, Mathew Birch, says trustees have plenty to do. They must keep financial records, keep records regarding the operation of the fund and any investments made and formulate an investment strategy.

"Trustees must ensure that contributions are made in accordance with the superannuation law, that financial statements are prepared and an annual return sent to the ATO," Birch says.

The tax office says its big three concerns are loans made by a self-managed fund to a member or relative, breaches of the in-house assets rule (which often arise when a small business owners use their self-managed fund to invest in the business) and assets not being in the name of the fund.

The deputy commissioner of taxation, Neil Olesen, told delegates at last month's annual conference of the SPAA that breaches of the rules were on the rise. Auditor contravention reports went up from 5300 in the 2006-07 financial year to 6600 in 2007-08.

Apart from the common breaches mentioned above, Olesen said a big problem was trustees gaining illegal early access to their benefits to cover personal expenses.

The ATO has identified about 1000 funds accessing funds inappropriately in the current financial year.

"Where we see evidence of carelessness, recklessness or intentional disregard of obligations, we will respond accordingly to the seriousness of the behaviour we see," Olesen says. "Our response may include making a fund non-complying [in which case a penalty tax rate applies], disqualifying a trustee or prosecuting through the courts."

Size matters

The general manager of the self-managed super fund administrator SuperConcepts, Paul May, says service providers see a growth in their business when markets turn down. May says that is when DIY trustees discover the set-up of their fund is not what it should be.

SuperConcepts administers 4000 funds, which have an average balance of more than $1 million.

The rule of thumb in the industry is that no one should start a self-managed fund with less than $200,000 to $250,000 but May says he has clients with $100,000 in their funds.

"If they have high incomes and they are going to be contributing a lot to super there is nothing wrong with starting a fund that size."

Companies like SuperConcepts offer levels of service that go right up to taking over the day-to-day running of the fund, handling all correspondence, payments and so on.

A service like that would cost $4000 a year for a fund with $1 million of assets. A more standard end-of-financial year account preparation would cost $1800 to $2000. It seems like a lot but May says it depends on the complexity of the asset structure of the fund and the need to have close monitoring of the investments and the regulatory environment. "When people come to us, after having tried to administer the fund on their own, the common problem is that they have not kept up with the paperwork," he says.

"There is more to do than they imagined and it is a mess. This is probably the thing that people don't allow for when they go into self-managed super."

The head of financial advisory at Dixon Advisory, Nerida Cole, says a current issue for trustees of self-managed funds is the change to superannuation legislation at the end of 2007 that allowed greater scope for borrowing by funds.

Cole says trustees need to be confident that their deed does not prohibit borrowing before they start investigating the growing range of gearing products being marketed to self-managed funds. "Some deeds will not get past the lenders' lawyers and will need to be amended. The system is subject to changes all the time."

What you'll pay

The fees involved in setting up and running a self-managed super fund (SMSF) vary widely. It can cost anywhere from several hundred dollars a year to many thousands.

The technical research analyst at Centric Wealth Advisers, Mathew Birch, says SMSF trustees will pay costs for the establishment of the fund, annual accounting and administration, annual audit fees, financial advice in many cases, actuarial fees in some cases and a taxation office annual return fee.

Fund establishment

Birch says there are SMSF trust deeds that can be downloaded from websites that cost as little as $220. Other service providers charge as much as $1100 for a deed and set-up.

He describes a trust deed that pops out of your printer as a "low-end deed". A more sophisticated deed has the advantage of providing greater flexibility when it comes to the direction of death benefits and other estate-planning matters.

Administration fees

Birch estimates the price range is between $1650 and $7700 depending on the size and complexity of the fund and the level of service required.

Some trustees have fairly simple asset allocations in the funds, while others take advantage of the flexibility DIY super allows and invest in a wide range of assets.

Likewise, some trustees have a simple requirement for the preparation of annual accounts, while others prefer an administration service that takes over management of all the paperwork, correspondence and distributions.

Audit fees

All funds must have an annual audit. Birch says he has seen fees as low as $330 and as high as $1650. Again, it depends on the complexity of the fund and the type of service provider.

Financial adviser fees

The majority of people who start a self-managed fund are interested in running the investment side themselves. But many discover it is a more difficult or time-consuming process than they had imagined. There is no average fee for financial advice; it depends on the size of the funds, the type of assets in the fund, the level of service (how often the fund is monitored each year) and whether the adviser receives a fee for service or trailing commissions.

Actuarial fees

These apply to pensions, where an actuary has to calculate life expectancy and set minimum and maximum annual income levels. Birch says he has seen fees range from $330 to $880 a year.

Annual return fee

The Australian Taxation Office charges trustees of self-managed funds an annual fee of $150 to lodge their returns.

Simple and effective way to go

Retired Narromine health and building inspector Bob Meadley never gave self-managed superannuation a second thought until he stopped working.

It was then he learned the fees on his Local Government Superannuation Fund would jump from 0.7 per cent a year to 1.5 per cent as he moved from the accumulation phase to a pension.

As a trustee of a self-managed fund Bob's objectives have been to keep it simple, high quality and low cost.

He invests in term deposits offered by well-known institutions and blue-chip stocks. He and his wife, Norma, live on the interest and dividends.

The only third party involved in the administration of the fund is the family accountant, who prepares an audit report each year.

Bob got the accountant to do the accounts the first year and in subsequent years has simply followed the format set up by the accountant.

"We do make mistakes, which the accountant picks up in the audit, and it takes a few hours a week," Bob says. "But I'm retired so I've got a few hours a week. On the whole I would say the accounting is a piece of cake. I'm surprised more retired people don't do it."

By taking this approach, Bob's self-managed fund incurs annual fees of just $645. The accountant gets $495 for the audit and the Australian Taxation Office gets a $150 lodgement fee.

"The key to it is that it is a simple fund. You can't get much simpler than blue-chip shares and term deposits."

Three things worry Bob. He thinks it is unreasonable that super funds should increase their fees by more than double when a person retires and moves into a pension. He has written to the Minister for Superannuation and Corporate Law, Nick Sherry, asking him to do something about it.

He thinks the ATO could do a lot better job with its Ongoing Education Program for trustees of self-managed funds. He has met plenty of DIY trustees who do not look after their funds very well and he thinks the idea of an education program is a good one.

But the session he attended in Dubbo recently made him feel like a naughty schoolboy sitting in a classroom.

Finally, Bob would like Norma to get more involved in the running of the fund. "My wife runs the family and she runs it pretty well. So it's fair enough that she leaves the running of the fund to me," he says.

"But I would [definitely] like her to get more involved."