A milestone was reached recently with the number of self-managed superannuation funds (SMSFs) reaching just over 1 million.

The appeal of DIY funds is much broader than to just the usual suspects thought to be most suited to running their own funds – small-business owners, self-employed professionals and highly paid employees. And tax office data shows that half the funds hold less than $518,000 in investments.

Now, many of these will have been started by couples who are relatively young and are building their retirement savings. About 40 per cent of new DIY funds are set up by people between 25 and 44.

But get this: Tax office data shows that five years ago, less than 20 per cent of those starting their own funds were aged 25 to 44. So the growth is occurring among younger and younger people. They want the control and are willing to take the responsibility for their retirement savings. They accept that the legal responsibility cannot be outsourced to anyone else who is advising them.

But surely there is more than this to explain the growth in DIY funds. SMSFs are not products in the sense of life insurance or managed funds. They are legal structures that hold assets with various rules about how the money is invested and how money is moved into and out of the funds.

However, there is an industry emerging around the administration of DIY funds. Advertising of DIY administration services is everywhere and awareness is increasing, including among those who are less suited for them.

Most people starting their own funds are more than capable of making their own decisions about their retirement savings. But the big growth in numbers also suggests that DIY funds are increasingly also set up by people for whom the benefits are marginal at best. They could be leaving a large superannuation fund with total costs of less than 1 per cent a year.

With DIY funds, there are the costs of investing, accounting and auditing that could be much higher than is paid on a large fund, especially if there is not that much money in the self-managed fund. Members of large funds are eligible for compensation if they suffer losses as a result of fraud or theft. For SMSF trustees, recourse is legal action.

However the chance of fraud is minimal for most trustees. That is because though DIY fund trustees have the freedom to invest widely, most stick to the investments they know best: shares in the biggest listed Australian companies and term deposits.

Most of the largest superannuation funds now offer term deposits and direct share-investing to their members. Brokerage rates on the buying and selling of shares through large funds are usually low.

And then there is life insurance. Most large funds offer their members life insurance with automatic acceptance and no need for a medical examination. There is evidence that trustees starting their own funds are leaving some money in their large funds to retain the cheap insurance cover.

Posted by John Collett – Money Manager (Fairfax Digital) on 19th June, 2014