By Amanda Morrall
How much will you pay your KiwiSaver provider to manage your retirement nestegg?
A lot potentially, with some paying almost as much in fees as they will earn themselves.
The exact amount will depend on a whole range of factors, some known, some unknown, so it is difficult to calculate with any certainty.
What type of fund you are invested in, how it is managed, how much it grows or shrinks, the term of investment, the taxes you pay and inflation will all have a bearing on how much you end up with in hand.
This interactive fee calculator will give you a sense of the importance of fees and performance and how that can bear out over the life of your KiwiSaver fund. Bear in mind that the annual average return is before the deduction of tax. (See also Sorted.org.nz's KiwiSaver fee calculator for fees paid on specific funds).
The rationale is that these types of funds (which have a higher exposure to shares and/or other riskier assets) require a more "active" style of management, which ostensibly means more work for the fund manager. (Check out our investment management 101 series by Kevin Mitchelson to read more on the difference between passive and active fund management.)
Conversely, those in default funds, cash or conservative can expect to pay less in fees, although there are some exceptions.
KiwiSaver providers maintain that the fees they charge to administer the national savings schemes are cheap; cheap relative to some of the other managed funds on the market.
The range is huge -- from 0.66% (as a proportion of the fund) to as much as 1.80% at the upper end. One's tolerance for fees might be measured by the level of return the fund delivers however neither -- that is fees and performance -- is clear cut.
Presently, there is no uniform way in which fees and expenses are reported. That is expected to change when new regulation comes into effect next year.
For the sake of greater transparency on the murky issue of fees, interest.co.nz has calculated a total expense ratio, which reflects, we believe, the total amount of fees and expenses you will be charged on your KiwiSaver fund.
Our Expense Ratio includes the fixed dollar 'membership' fee that almost all funds charges. Although only averaging around $35 a year, that is equivalent to a fee of more than 0.5% for an average KiwiSaver balance of $6,600 - and this was the actual average as at September 2010.
We have included this fee on the basis of a $10,000 balance. (For more detail on how KiwiSaver makes you money see Kevin Mitchelson's piece here). See also our KiwiSaver Q&A section for a list of questions generated from readers.
Performance reporting is another area that regulators are hoping to improve upon through the introduction of a universal reporting standard. That too is expected to occur next year with the mandatory provision of quarterly performance reporting after tax, fees and expenses (uniformly structured) for KiwiSaver members.
Again, we have attempted to level the playing field with our performance adjusted data which can be seen here.
Performance counts a lot because regardless of how well your fund does, you continue to pay those fees year on year.
Taxes will also bite into returns reducing the amount you can expect to earn over time.
At the moment, KiwiSaver is taxed along the way, at varying rates depending on your income level and also asset allocation. The tax burden is set to become even heavier as a result of the employee superannuation contribution tax (ESCT) due to take effect April 2012. Where employer contributions were once tax free, the ESCT will means that you will now pay tax broadly in line with your marginal tax rate. (See Inland Revenue website for more details.)
Reduced member tax credits, that's the matching funds you receive from Government, will also be reduced from a maximum of $20 a week to a maximum of $10 a week. Because the tax credits from Government are paid out as a lump sum once a year, they reduced amount is already being applied.
To compensate for the diminished contributions in this regard, National is raising minimum contribution amounts for employees and employers to 3% starting in 2013. While the higher contributions may help to keep savings from sliding, those who want to protect their nestegg from unnecessary erosion would do well to keep tabs on fees and performance.
16 Comments
Not valid as critiques of KiwiSaver in particular.
All commercial investment products charge fees, whether or not you are actively investing into them. Why not, when they are still managing your money and incurring expenses?
All commercial investment products keep your money if you go off somewhere and don't tell them where they can find you. What else are they supposed to do with it?
I agree MDM, much better to be in a scheme where you can control your assets, and the consequent costs, and also get out if your or the economies circumstances change. Something tells me that over the short life of KS a lot has changed. I am guessing fairly confidently that a lot more is going to change before you see whatever is left of your money in <<nn>> years/decades.
Good to finally see some analytical reporting on the much hyped KiSs you money goodbye scheme. And remember all you members there is no out from this scheme. You pay the fees even whilst taking a contributions holiday till retirement age.
No wonder FINSA love it.
Good luck with keeping tabs on fees and performance on a scheme you cannot exit.
When you have money on fixed deposit the bank takes a % of the return too - probably a similar amount (the difference between what they earn on your money and what they give you.) What's the difference?
These organisations have to pay people to run these funds. You could always put your money in a sock under your bed so no one gets any of it but then then you'll get no return. I think the net return is really the only relevent figure - have you calculated that?
Your figures make it look like you get less than you put in. Why don't you show on the graph the green bar divided into the amount the person has put in themselves and the return the fund manager has made for them and you'll get a more honest picture.
The difference is that the bank only takes it out of profit, not from losses as the funds do.
Wait to we start seeing some big negative numbers, which we wlil, and then see the outcry.
FYI a compulsory fund I was in went back 10%, 10% and 1% three years running in the early 2000's. It takes a lot to come back from a compounded hit like that.
Also including the $35 fee on the basis of a $10,000 basis is nonsense over 20 and especially 40 years if people are saving over that period. The $35 as a % of the fund is going to far less as the funds build up.
If the expected return is 8.5%, the gross annual fee is say 1.5% then the expected return net of fees is is going to be 7% , (Then tax comes off). You don't lose 27% of your money at all.
0.5% is correct on the figures as given in September 2010. The average deposit amount would have increased by then as there are less people joining now and as the balances increase the $35 admin fee as a percentage will also decrease.
At $20k the fee represents 0.175% of the balance and at $100k 0.035%. At that stage there maybe the oppertunity to negociate with providers for a discounted admin fee.
@LAJ
You are correct when you say the fixed dollar fee will shrink as a percentage as your KiwiSaver balance grows. At the moment the average KiwiSaver balance is around $7k, so we have been generous in using $10k.
As time goes by, expect the providers to stop charging a fixed fee and move to a percentage based one. The only reason they started with a fixed fee is that the balances were so small, they would have made nothing with a percentage based one.
The point of the calculator is to give you a sense of how fees can eat into any investment return, not to provide exactitude. This is especially important as I have the sense that double digit returns are going to be the exception for some time.
What you are probably missing in your disbelief that you can lose so much to fees is the power of compounding - that works for fees as well.
If you don't trust my arithmetic, check out this at Vanguard, one of the biggest US mutual fund providers (we like good ideas when we see them).
Cheers, Kevin
I'm not disagreeing with your calculations, just your presentation and interpretation. Your wording implies you get out less than you put in as does your graph. Split the green bar into contributions and earnings and I'll be happy.
PS I am not disbelieving- I have done unit pricing for a fund so well aware of how it works.
Well done for acknowledging Vaguard. I thought it looked like one of their things :-)
As Vanguard rightly say, when saving over the long term. compounding interest is your friend - but it can also be your enemy when it is applied to fees deducted. The graph is valid when seeking to prove that particular point.
However, I do tend to agree that the graph implies that the investor's returns are more pummelled by fees than they actually are. The green section includes the growth achieved by the investment. The green bit is only that big because the fund has achieved x% growth. If the actual $ investment was represented somehow (by a sock, perhaps?) then the true picture develops.
Confusing tool. Even Amanda appears to have misinterpreted the results:
"Over a period of 20 years, I might expect to pay my provider 27% of my KiwiSaver fund at maturity, retaining 73% for myself. Over 40 years the split would narrow considering with 41% going to my provider and 59% to me. The calculation is predicated upon annualised returns of 8.5% over that time which is ambitious."
Actually, it's telling you that over 20 years, your fund is 73% of the value that a fund with 0% expenses would be. (Or 59% over 40 years). This is certainly a useful thing to know - it tells you how expenses will affect your final return - but it doesn't imply that the "the rest" is paid to the provider. Much of "the rest" just isn't there at all because it wasn't ever invested in the fund - it went out as expenses early on! The expenses that the provider receives are actually a fixed proportion of the increase in value (something like 17% in your example, I think).
Of course you could argue that the provider could turn around and invest its fees at 8.5% itself - but then where does the cash for the fund's day to day expenses come from?
@yet another account
You are right when you point out that the fees and expenses get taken out of the fund and never invested.
However, look at the fees and expenses as an opportuity cost. If you were not paying them, they would be invested. Hence you have lost the value they would have given you in the future.
Kevin
If I was a member of Kiwisaver, which I will never be, I would be looking for a fund manager that works on commission only.
How the hell else can you ensure performance and accountablility.
Talk about a free lunch for the fund managers, I can't believe that people are so gullible.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.