A lot has been written in recent years about KiwiSaver fees – and for good reason, says AUT’s associate professor Aaron Gilbert. But how do KiwiSaver fees work, and why are fees something you should look at?
How do KiwiSaver fees work?
In general, there are two fees quoted for KiwiSaver. A per-year dollar fee, referred to as a ‘member fee’. This varies between providers, but is generally around NZ$25-50 per person a year.
The second fee is the total fund fee (although the name for this changes depending on the provider). This is made up of various smaller fees, like management and administration fees. Total fund fees are quoted as a percentage. For instance, one provider’s growth fund total fees are estimated to be 0.9% p.a.
But 0.9% of what?
That fee is charged on the total amount of money you have invested with your KiwiSaver provider. For example, if you had NZ$10,000 invested it would be NZ$90 for that year, plus the member fee. If you had NZ$100,000 then your fees would be NZ$900, plus the member fee. So as your balance grows, so too does the cost of your KiwiSaver account.
You get charged a fee regardless of returns
It’s also worth noting that you get charged your fee irrespective of whether the fund performs well or poorly. With the exception of 2008, when KiwiSaver was in its infancy, returns have been strong for all the funds, reflecting strong growth in financial markets worldwide.
But we will likely have a downturn at some point. This is the point where you’ll really feel the higher fees. Higher fees while your money is growing are easy to overlook, but if your fund earns a negative return, then the difference between a low and high fee provider becomes more obvious.
The impact of fees is more than you think
The bigger cost of fees is their compounding effect.
Consider two funds that have the same average return over 40 years, but one has higher fees. Over and above the higher total amount in fees you pay, you will also wind up with much smaller investment returns.
This is because as those fees are charged, they reduce the amount you have invested – your balance. That small reduction in your KiwiSaver balance means you earn slightly less in interest and returns in the next period.
And over the life of your investment, those slightly larger per-month deductions can amount to tens of thousands less cash at retirement.
Returns aren’t guaranteed
Providers will tell you that you should focus on after-fee returns. The problem is that future performance is not guaranteed.
We can also see many examples in the Morningstar KiwiSaver Quarterly Reports where cheaper funds have a similar or the same performance over long periods as more expensive funds.
Hundreds of academic studies across the world that have found that consistent outperformance by fund managers, after controlling for risk, statistically doesn’t occur.
If high fees can’t guarantee high returns, but fees are certain, doesn’t it make sense to pay more attention to the cost of your KiwiSaver account?
First published 11 October 2018
Story by Aaron Gilbert
Aaron Gilbert is an Associate Professor in Finance at Auckland University of Technology. He researches in a wide range of areas to do with the financial markets, including law and finance, corporate governance, and KiwiSaver.
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.