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.
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