By Amanda Morrall
A few years ago I was trying to weigh up whether it would be better to enroll in a workplace superannuation scheme offered by my then employer or go into KiwiSaver.
I soon discovered the complexity of the decision. I polled some colleagues in the business department and got uniform shoulder shrugs.
Being the pesky and persistent reporter that I am, I pushed and prodded the HR department for some assistance in this regard, rallied the troops in the newsroom for an expression of interest in a Q&A session, and also harassed my financial advisor.
Emails were exchanged, phone calls made, inter-office envelopes received.
At the end of it all, I wasn't any wiser for my efforts because basically I couldn't get any straight answers. Had I kept pushing, it's possible I might have triggered an avalanche of education for myself and my colleagues but as I seemed the only one to care, I gave up the cause and took the Russian Roulette approach.
Well, to be honest, I put my retirement chips with my employer-based superannuation because over time (from what I was able to gather) I would get bigger contributions and also, it came with built-in life insurance. It was the main tipping point because it came closest to what I could interpret as a better deal.
A subsequent change in jobs meant I had to dig into my own pocket for insurance and switch into KiwiSaver. It wasn't forced on me. For better or worse it was a choice, I could have taken the money and gone to Cuba but I thought better of it and my future in old age.
I see now the flexibility in being able to make that choice is also another feature that works in the favour of some work-place superannuation schemes although I still have my doubts as to which is better.
Perservere
You can thank a persevering reader for pushing me to take a fresh look at the KiwiSaver vs workplace super debate.
Comparisons between the two aren't easy because there are a range of factors that have to be taken into consideration. It would be impossible for me to explore all the nuances of the various schemes on the market and measure them against individual circumstances and then extrapolate from that whether KiwiSaver is a better deal or not.
What I can do is encourage individuals who are interested in this issue to do a little digging for themselves and point them in the direction of some tools.
A case study is helpful.
One reader emailed me with specific concerns about the Sovereign Personal Super scheme and wanted to know how this fund stacked up to KiwiSaver because of its less than impressive returns and the inability to make an tidy exit.
"Their performance really seams sub-par and with little ability to leave the scheme without forgoing any benefit having your money locked in over the past 15 years, there appears to be little other option than to keep comparative pressure on."
Leaky ships
I commiserate dear reader.
Having your retirement money locked into what would appear to be a sinking ship or else one that is just bobbing along waiting for a tug-boat rescue from a major market recovery is frustrating to be sure.
As you didn't specify which Sovereign Personal Super fund you are in, I'm going to have to hazard a guess here.
Sovereign has a whole slate of super funds on the go although some are retired in their own right as they are no longer on offer to new employees.
Research house Morningstar is probably your best bet for cyber sleuthing your fund.
It's a bit intimidating at first (and their website is about to undergo a massive revamp) but you'll soon get that hang of it.
If you click on the Fund Selector Box, then scroll through the list, you'll find Sovereign pops up twice. With assistance I was directed to the Sovereign Life (NZ) Ltd category; that's where I found your Personal Super among 15 others carrying the Sovereign prefix.
In the Personal Super category, there are four varieties. Their ratings (a star chart system designed by Morningstar) range from 2-4, five is the highest. From the tone of your email, I gathered your star chart is thin.
If you want to find out how each differs from the other, you should ring Sovereign and get an explanation of the asset allocation and make-up. In general terms, funds with the words balanced or conservative, or moderate, have a lower weighting of equities in them.
In terms of performance, there's not much to distinguish them.
The annual returns over seven years on all these Personal Super, range from 2.35%-3.26%. To see for yourself, click on the drop down menu called "overview" and scroll down to performance, then search. Alternatively, here's the link to Sovereign's website where performance is published.
Morningstar calculation is reported as a "total return" but the performance picture here isn't complete.
As Morningstar researcher Chris Douglas explained to me, fund managers in charge of the "legacy funds" are under no legal requirement to fully disclose all the fees and expenses. It's only on request, and then not always, that information on fees and expenses is provided.
Don't be fooled by the "entry fee" of 3.0%. There's a whole host of other hidden fees that could be eating into that slim return.
The figure you really want is something called the management expense ratio, a total of all the running costs you can expect to pay on this fund.
This is where you'll feel the "ouch factor" of managed funds.
Compared to KiwiSaver fees (which are loosely set by "best practice") these older superannuation funds have no such framework to tame fees. Worse still, there is no compulsion by Government for managers of these funds to fill you in on that.
The legal reporting requirement on was apparently killed three years ago. New rules are in the process of being drafted by the government so that will likely change next year.
Douglas who works with the numbers daily and thus has a sense of comparison tells me "These legacy products have some juicy fees.''
How much? At the high end they can range from 2%-3%. The upper end in KiwiSaver would be 1.7%
When I asked Sovereign what the management expense ratio on the Personal Super fund was, I was directed to their website. It was a poor substitute for a real answer but for what it's worth, this is how they break down their fees:
What will it cost me?
We will make some charges for administering your Plan. When you look at the charges, it’s important you consider them over the whole term of the Plan, not just one year.
Plan fee
A monthly plan fee is deducted from your investment balance to cover the ongoing administration of your funds. This is $3.50 per month, and will increase annually at the rate of inflation.
Contribution fee
Every regular contribution you make has a fee of 2.5% of its value. Lump-sum contributions have a maximum fee of 3.5% for each lump sum invested.
Investment management fee
Your Plan may contain up to three different types of units which have differing levels of investment management fees.
Trustee fee
A Trustee fee of 0.1% per year at the gross value of the total investment funds in the Plan, plus other expenses are deducted from the Plan's total funds.
Switching fee
You can switch your existing funds between the investment funds whenever you wish. There is no charge for the first two switches per year. Subsequent switches attract a charge of 1% of the value of funds switched. Other conditions
Sovereign can change the charges and fees under the Plan without notice.
No wonder fund managers bury this stuff and shrink it: the fine-print is scary stuff.
If you go onto Sovereign's website you'll see they refer to a juicy bonus for staying in this plan. It looks to be a long-term bonus delivered after 10 years and also when you turn 60. Hopefully it makes up for the high fees and ho-hum performance but I wouldn't hold your breath.
I expect it makes KiwiSaver seem a knight in shinning armour by comparison but the fees and performance range here is also wide ranging. Remember it's still early days for KiwiSaver.
Some top ranked funds, including Aon Milford, Fisher Funds Growth and Fidelity Options, boast average double digit returns over a three years period - after fees but before tax. Whether that's sustainable remains to be seen.
Keep in mind those high flyers are "aggressive", or "growth" funds, which are riskier and therefore more volatile. If you're close to retirement, financial advisers tend to steer you into more conservative funds.
I suggest you have a look at our performance rankings list , find the category of fund that is closest to what you have in Sovereign and then compare performance and fees.
For example, among the balanced funds we are tracking Mercer Super and Fidelity Balanced reported by the best returns - 4.8% per annum over three years since March 2011 and 5.4% respectively.
To get a more accurate picture of how much you are paying in fees (all up), phone Sovereign and don't hang up until you get the straight goods.
Don't settle for a link either. I only did because of a deadline. Persistence and patience are the pay-offs in managed funds.
5 Comments
Ouch! If the idea of the lock in is to protect the client from withdrawing and spending the money early, why don't they allow a transfer to modern plans that are "equally" secure.
No wonder people invest in property for thier retirement. These things always seem like they are each individual against the corporation. Simplest thing is don't go there in the first place.
I think the problem is many first-time investors and employees paying into schemes put their faith in the fund and the manager that both will perform and are working in their best interests.
The entire financial services sector has got rich on the back of consumers and investors who were either too busy, couldn't be bothered or didn't know where to look for information or who to hold accountable.
The greater scrutiny there is the more competitive fees will become. If the handcuffs aren't gold, or at least silver, they should come off.
Time for investors to take a stand and for the MED to roll out those rules on universal reporting requirements so fees and performance can be more easily understood by the masses. It would help by putting greater emphasis on what's in the fine-print instead of logos and pretty pictures.
As a really sweeping generalisation (and there will be exceptions), I would say that most "proper" workplace schemes where the employer is putting in real money should still compare well to KiwiSaver. Ideally, you could have been in both. It's a shame that your previous employer / financial adviser didn't have answers instantly. The employer should be proud of their scheme and brag about it.
Yes, Lucky, lucky me!! I have one of these (Sovereign PSP). Really, not happy that they can jack up their take, irrespective of performance, which has just managed to return more than I have invested.
The one thing I will say, if this was not set in stone, given the way I used to spend cash, then even that wouldn't be there, interest or not. So, the reality is poor performance aside, it has saved me from myself, which is why I went into it in the first place.
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