High fees can impact your KiwiSaver returns. Photo / Getty Images
A 20-year-old could pay an average of nearly $39,000 in KiwiSaver fees over their working life - or less than $8000, depending which fund they choose.
Sorted's KiwiSaver fund finder tool has been rejigged and relaunched this week to allow investors to compare the lifetime cost of saving for their retirement.
In the balanced category, the highest-priced fund is nearly 10 times the cost of the lowest-fee fund and one provider - NZ Funds - has no fees on its balanced fund.
Tom Hartmann, Sorted's personal finance lead, says fees on KiwiSaver funds are typically represented by a tiny percentage, usually around 1 per cent, but a few points can add up and make a huge difference.
"We really wanted to make it quite clear the impact these tiny percentage points over time, especially long periods of time, make.
"That is the reason why we chose to represent it in that way - real dollars and over long periods of time. Usually in personal finance it is a helpful thing to take a 10-year view on anything - how much does it take to run a car, run a lightbulb, how much does it take to run your KiwiSaver?"
KiwiSaver fees have come down in the past year, after the Government reappointed the default fund providers last year with a big focus on fees.
The six default funds, which are now all in the balanced category, are among the eight cheapest funds in that category.
Apart from NZ Funds' zero-fee fund, Super Life's default fund - run by stock exchange operator NZX - is by far the cheapest, with the 20-year-old paying $7701 in fees until age 65. That compares with Fisher Funds' balanced strategy fund, in which that same investor could potentially pay as much as $73,542 over a lifetime of saving.
Asked how there can be such a big difference, Hartmann says that's a question best asked of the KiwiSaver providers.
But one key difference he notes is that the cheapest funds are all index trackers.
"Our cheapest funds here we know them to be index trackers that aren't employing active fund managers to make individual investment and trading decisions.
"We also know that active management will typically feature more trades, which brings a cost with them. The index tracker will typically require a lot less in terms of overheads in order to run. So in that sense that explanation does ring true but 10 times the difference - it really deserves putting a spotlight on."
A Fisher Funds spokesman said the reason the Balanced Strategy Fund was an outlier was because in the year used for the fee comparison (year ending March 31, 2021) the fund returned 19.63 per cent and incurred a one-off performance fee.
"This cannot be used in any 45-year assumption as achieving the exceptionally strong returns that trigger a performance fee being charged will only occur very occasionally over a 45-year period."
Instead, the spokesman said, it was more appropriate to look at its Fisher Funds Balanced Two Fund, which could charge fees of $38,504 over the 45-year period.
"This is less than the average balanced fund fee amount of $38,707 over the same period." But even that is still five times the fees of the lowest-cost fund.
Fisher Funds chief executive Bruce McLachlan says part of the reason for the big difference is that the calculation is being done over an extraordinary length of time.
"Secondly, the focus of our business is maximising clients' balances at the end of the 40 years, not just the incremental cost on the way through - that cost - what clients are paying for is active management on the investment side which generates a substantially higher return."
McLachlan said it also reinvested the fees in providing information, education, advice and support to make sure its clients made better decisions.
"Getting clients making the right decisions, contributing the right amount in the right fund and supported and educated on the way through comes at a cost. We do a survey that measures our clients' confidence of what they are invested in versus the market and it's high - if you want to know what they are paying for it is confidence and peace of mind that they are invested in the right thing and the strategy is right and that they are going to maximise their return over their lifetime.
"Ultimately, it is what our business is set up to do. I accept as there is in every product category of everything - you can buy a cheap version that doesn't provide an adviser, doesn't provide education, doesn't do information services. Those exist but that doesn't mean it is right for everybody."
Hartmann accepts that choosing a KiwiSaver fund is not as simple as picking the cheapest option.
"It is not, but the funny thing that happens in finance ... when you are buying anything else, when you pay more you would expect to get more, but in finance the more you pay the more it is detracting from your results - your returns.
"The more that is taken out in fees, the less of a return you get."
Hartman admits that returns after fees are what really matter the most.
"But those are unpredictable. Whereas fees are much more predictable - we are able to project over many decades if fees stay the same, which is not beyond the realm of possibility. This is what you are going to end up paying.
"The most important thing is what the returns are after fees, it is just that those going forward are much less predictable.
"If I estimated what your results were going to be based on a dollar amount based on what the returns have been in the past, I would be doing you a disservice because we really can't predict it. The short answer is we really don't know."
Hartmann says when it comes to choosing a KiwiSaver fund, the first step is to determine the level of risk you want to take.
"That is highest predictor of the result - how much risk you take on.
"But the next biggest impact is definitely fees. The third is the services - those are based on our six-monthly surveys. And then we get to returns."
The tool also allocates a rating out of five for service and records the average returns for a fund over five years compared to the average across the sector.
Fisher's McLachlan argues that too much focus has been put on fees in recent years by the politicians, regulators and the media.
"The problem is New Zealanders don't understand it all that well, they are not well prepared for their retirement and we keep creating this mythical thing that if you keep focusing on your fees you will be alright and it's not going to be alright.
"The most important thing about whether they are set up for their retirement or not is are they contributing enough? Where's the debate on that?"
Outside of that, he says members need to be getting their entitlement to employer contributions, be on the right tax rate and then consider the returns.
"The performance of fund providers is massively different and 1 per cent on your returns over 40 years is worth infinitely more than any fee."
Fees come a distant fifth in his mind.
McLachlan said there were 30-odd providers in New Zealand.
"There is cheap and cheerful. There is more expensive and there is a massive difference in performance. It is a market that is working well in that sense. The regulations have bought in transparency around fees. No one can say there is not clarity and great choice for investors in the market."
Nearly a year ago, KiwiSaver regulator the Financial Markets Authority announced that KiwiSaver providers and their supervisors would have to come up with evidence that they were providing value for money when it came to their fees.
But it turns out that this may not have been as simple as first imagined and the regulator is now running a pilot trial for an assessment tool.
FMA chief executive Samantha Barrass recently told the finance industry that the pilot had proved to be a useful review of how well providers had been applying the principles in the FMA's guidance and it would be publishing the findings in the next couple of months.
Asked about industry concerns regarding the messaging that cheapest was best, Barrass said the focus should be on the full offering.
"Consumers and investors can well end up with a poor outcome and poor product if the only thing they are focused on is price.
"What any investor is going to be looking for, and certainly what we are looking for, is that the overall product is worth the money - so if more is being charged that it is genuinely reflective of the service that is being provided."
The value for money pilot may well reveal more to investors but for now Hartmann says Kiwis would do well to pick a fund with fees that appear reasonable and then do a cost-benefit analysis with the services on offer.
"Because in terms of the returns you get, they are not predictable going forward."
However, he suggests investors do avoid funds that have consistently underperformed their peers.
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