QUESTION: I am worried about the impact of fees on my KiwiSaver savings. How do I find out what they are and the impact they are having on my scheme?
ANSWER: KiwiSaver fees have been in the news lately. You might have heard Green Party Co-Leader Russel Norman saying that people could save up to 40 per cent or $64,000 in fees over the lifetime of their savings by investing in a lower-cost fund. Is this a pre-election attention-grabber? Let's take a closer look.
KiwiSaver fees are scrutinised by the regulators and are required to be "not unreasonable". Just the other day NZ Herald business writer (and Hawke's Bay local) David Chaplin analysed all fees and expenses as reported by providers and came up with the rather modest figure of 1.4 per cent of funds under management as an industry average. Contact me if you would like to see his figures.
To find out what fees are deducted from your fund, go to the investment statement and find the page entitled "What are the charges?" Fees are taken out before the unit price is calculated. You may also be paying an admin fee of around $3 per month and you will see this on your statement.
If you want to find out how your fund compares with other funds, there is a great calculator on the 'Sorted' website. You will pay lower fees if you are in a passive fund (which tracks an index) or a cash type fund. Active funds - which rely on the skills of the manager to aim for higher returns - will generally charge higher fees.
According to the 'Sorted' calculator, a person aged 40 earning $60,000 per year will pay between $3460 and $16,900 in fees over 25 years.
So where did Russel Norman get $64,000 from? To achieve a saving of 40 per cent or $64,000 (in today's dollars) we're talking total fees of $160,000 over the lifetime of your fund. I struggled to get the Sorted calculator to spit out these numbers. You would need to be a 20-year-old earning $50,000 per annum contributing 8 per cent of your salary into an active boutique fund for 45 years to pay fees of this magnitude. You have to admit, a highly unlikely scenario.
Are fees that important? Compared with the considerable financial incentives to join KiwiSaver, the fees are inconsequential. The attraction of KiwiSaver comes from the Government and employer top ups - a wage earner on $60,000 and contributing 2 per cent is getting $1.43 for every dollar they contribute themselves.
Performance is also more important than fees. If your fund is doing better than most, you probably won't complain about paying fees.
On the other hand, if you are in a fund with the lowest fees you won't get any satisfaction if your fund is coming last in the performance race.
You are free to change managers. That in itself should keep fund managers on their toes and motivated to deliver.
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 8703838. The information contained in this article is of a general nature and is not intended to provide specific or personalised advice. KiwiSaver questions can be sent to www.peak.net.nz or email shelley.hanna@peak.net.nz.