Fees, fees, fees. Most Kiwis will pay a small fortune in fees by the time they've been investing for a few decades in KiwiSaver. Fees are a necessary evil because it costs money to run a KiwiSaver fund.
Whether or not we're paying too much in fees is murky. Some observers think there is so much money sloshing around in KiwiSaver that providers may have their snouts in the trough.
Most KiwiSaver funds have a straight annual percentage fee of the money you have invested. The trouble with this is that It costs no more to manage your fund as it grows. So in five or 10 years' time when your money doubles, so will the fees you pay.
Providers with the highest fees argue black and blue that their returns justify the fees they charge. They may. But every provider can seize on statistics or arguments to show its approach works best.
Weathering the storm
There's an argument currently that managers who are hand-picking investments for their KiwiSaver funds will weather a downturn in markets that many are expecting in the near future. They say lower fee funds such as Simplicity and ASB are invested in funds that simply buy a bit of everything in their "index" and are going to be hit hard when stock markets take an inevitable dive.
The other low fee provider is the newly launched Juno KiwiSaver. Juno hand-picks its investments like the majority of providers, but charges a fixed dollar fee rather than a combination of annual fee plus percentage of the investment.
It's worth noting that there are years when a fund investing in hand-picked shares will do better than a tracking fund and vice versa. Likewise KiwiSaver funds that invest in one market such as New Zealand will likewise do better than those spread worldwide, and vice versa. In some years, albeit rarely, a conservative fund may have a better return than a growth.
Enough is enough
The other type of fee KiwiSavers may pay is a performance-based fee. The manager is incentivised to get better returns because it earns a higher fee.
Mike Taylor, whose company Pie Funds recently dropped performance fees, argues that fund management companies and KiwiSaver providers have economies of scale and shouldn't be charging exorbitant fees.
If the current approach to charging by KiwiSaver providers continues, their returns could become super-profits, says Taylor.
The Financial Markets Authority (FMA) tool at tinyurl.com/FMAtracker shows that because the fees are charged on the total invested, not just the growth, some of the KiwiSaver funds take more than 25 per cent of members' growth in fees.
It's not always the highest-earning ones that take the most. The highest-returning fund of all returned an average of 15.6 per cent per year for the past five years. It charged a relatively modest 8.3 per cent per annum of that return in fees, which meant members received 14.3 per cent net.
Of course the higher the returns, the easier it is to swallow large fees and still leave a decent overall return. Not all agree that this is a justifiable argument. What's more, past returns are no guarantee of future returns.
Total dollar figure
Sorted.org.nz's KiwiSaver comparison tool slices and dices fees differently. It shows the dollar figure of funds' estimated fees until retirement and what percentage of your overall investment that adds up to.
For a 25-year-old investing 3 per cent of a $45,000 salary over 40 years with matched employer contributions the most expensive fund currently over five years is the: Lifestages Growth Portfolio. The dollar figure is $76,490, which amounts to 44.7 per cent of your total investment by retirement. At the bottom of the scale currently is the BNZ KiwiSaver Cash Fund where you'd pay $6850 or 5.3 per cent of your pot at the end of 40 years.
These raw numbers don't necessarily tell you all you need to know. The example above isn't an apples for apples comparison because one is a growth fund and the other cash. A better comparison would be all growth, all conservative, or all balanced funds - of the same flavour rather than pitting one different flavours of funds against the other.
While the FMA data shows that high fees don't guarantee a better return, it does indicate more clearly that taking greater risk with a growth or aggressive fund can bring a better return. But not everyone can stomach the ups and downs of an aggressively invested KiwiSaver.
Ultimately not saving in KiwiSaver at all or being in a low-growth fund when your time horizons are long will cause more damage than being in a high-fee fund. But if you are in a low-growth, high-fee fund, shopping around might be beneficial.