Please don't lose too much sleep over your KiwiSaver fees. Fees are important, but returns are even more important. So is contributing enough to get full Member Tax Credits each year, and making sure you are in the right fund for your investing timeframe.
Neglecting these three will cost you far more than you will ever pay in fees.
KiwiSaver is a well-regulated savings scheme subsidised by the Government. The Financial Markets Authority (FMA) scrutinises fund managers' costs and fees to make sure they are 'reasonable' - as they are by law required to be. You can find out how fund managers' costs and fees compare by doing your own research using the handy Sorted FundFinder tool.
What fees are we talking about? First of all, most KiwiSaver members pay a monthly administration fee of $2 to $4 per month.
That's a bit like the fee you may be charged for your bank account and it covers some of the basic costs of managing the account. Then there's the internal fund manager fees and costs.
For most KiwiSaver funds this works out to 0.5 per cent to 1.5 per cent a year on the amount you have invested (say $100 per year for every $10,000 invested). The fund manager can't tell you in advance how much it will be, as the amount will vary from year to year. Why is this? Let me explain.
If you are a fund manager and you decide to start a KiwiSaver scheme, there will be costs from day one.
There will be legal costs to create the investment entity and then there will be compliance costs.
You will have to pay staff to do research and make investment decisions and staff to communicate with your investors.
One of the biggest costs will be the computer technology to track every dollar that moves in and out of your fund, create reports, and ensure that the data and customer information is safe from cyber-crime.
You will be regularly audited by the FMA so your investment strategies and methodology will have to be recorded appropriately. You may decide to outsource some of the investments to fund managers overseas and there will be costs in doing that.
Every time you buy and sell shares, you will incur brokerage charges. You will also have to pay an independent trustee to provide oversight.
You can find out the costs of running your fund in your fund manager's annual report.
This will list management fees and trustee fees as well as fees for custody and accounting, brokerage, auditors, legal, regulatory, postage and printing.
All the fees add up to what we call the TER or Total Expense Ratio. This is the ratio of total fees to funds under management, expressed as a percentage, and it provides the most accurate method of comparing fees and charges between fund managers.
Usually the larger the fund, the lower the cost to investors. This means that as KiwiSaver balances grow, Total Expense Ratios should decline.
The online tool at FundFinder gives a breakdown of fees (TER) for 181 KiwiSaver funds, so you can find out just how cheap or expensive your fund is.
Low risk and passive funds are cheaper to run than higher risk, active funds but which will give you a better return?
Returns are quoted after fees, so it is quite easy to see if you are getting good value for money.
- Shelley Hanna is an authorised financial adviser FSP12241. Her free disclosure statement is available on request by calling 06 870 3838 or go to www.peak.net.nz. The information in this article is general and is not personalised. Send your KiwiSaver questions to email@example.com