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Morningstar's Chris Douglas talks to Amanda Morrall about KiwiSaver fees; the lack of transparency, how to judge investment value for money and what to watch for.

Morningstar's Chris Douglas talks to Amanda Morrall about KiwiSaver fees; the lack of transparency, how to judge investment value for money and what to watch for.

By Amanda Morrall

Fees on managed funds matter, that is much is widely agreed, but what is far from certain is how much you pay.

The contentious issue once again reared its head after the Financial Markets Authority (FMA), in its annual report on KiwiSaver, stated that KiwiSavers in default funds had lost close to half of their return on investment to fees. (Otago Daily Times carries the details). Given that just under a quarter of the more than 1.7 million KiwiSavers remain in default funds, the claim understandably caused a stir.

While fees vary sharply among providers and the 200 odd funds on the market, the relative costs for defaults funds are reportedly among the lowest. 

Chris Douglas, co-head of research for Morningstar, said that while investors need to be pay close attention to fees , they shouldn't assume that if they are in a default fund that they're getting gauged.  He said inconsistencies in reporting methods and data collection on fees, even by the FMA, cast some doubt on the accuracy of reports on fees.

"Fee data in New Zealand has got to be one of the more frustrating elements of KiwiSaver. There is still no regulatory framework in place for a fund manager to have to disclose what the total costs of their fund is. What happens then is you get a lot of data come out, different methodologies and frameworks, different assumptions and you end up getting some numbers that show some hideously expensive options while others appear quite cheap.''

Douglas said the truth was likely "somewhere in the middle. At the same time its incredibly frustrating for investors and we definitely need to see some more transparency out there."

The annual membership fees on KiwiSaver just scratches the surface. There are management fees, administrative fees, legal and trustee fees, expense and costs that are not explicitly disclosed.

Whereas most other countries are required by regulators to disclose a total percentage based cost on managed funds, KiwiSaver providers are under no such obligation.

"So investors, when they are buying into a fund, they can see what the cost has been under the last financial year.''

While the Financial Markets Authority is reviewing disclosure and reporting requirements, changes aren't expected until late 2012 or 2013.

In the meanwhile, Douglas said investors should do some research and ask questions of providers themselves. (See also David Chaplin piece in the New  Zealand Herald on fees).

"I know it's incredibly frustrating for investors and we definitely need to see some more transparency out there...The Government has got to step up and we need regulatory requirements around fees for KiwiSavers.'' calculates what we have called an "Expense Ratio" (see here for how we do it) and at this ranges from around 0.7% to over 2% of your investment per year.

While above average performance might justify the higher fees in some instances, Douglas said research points to low-fee funds being the long-term winners for investors when it comes to returns. (See after-fee performance rankings here).

Douglas said investors need to be "very cynical" about fund managers who suggest you get what you pay for in KiwiSaver, promising outperformance in return for higher than average fees.

"What we have found is that by and large, is that low-fee funds out-perform high fee funds.''

"One of the factors is that if you have a high fee, you just have a much greater head wind of trying to beat the market and your peers. It's very difficult to consistently to do that.'' (See the effect of fees on your investment here)

Douglas said Morningstar's research also suggests that low-fee fund managers are generally "better stewards of investors' money.''

"They tend to be more mindful of costs, mindful of turnover and they tend to be more focused on the long-term, so the outcome is better for investors.''

So what should a KiwiSaver look for when it comes to measuring and monitoring fees?

Douglas said transparency was key but KiwiSavers needed to be vigilant about doing their homework. (Look up your fund here and compare it to other like funds).

Morningstar's KiwiSaver performance result to Sept.30, can be seen here.

See also's comprehensive KiwiSaver section here.




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Fees must be the number one issue and even more so if we end up with a compulsory Kiwisaver situation, because here's the rub - to the degree a thing is government regulated is exactly the degree it isn't competitive.

I'm not saying there aren't options for your investment, not saying it's a monolopy.  What I mean to say is that the main requirement of the fund providing the investment is regulatory compliance.  Above any, and every, other issue they must comply with whatever regulatory framework a government creates.  The policing effect of the open market ceases to function or be relevant.

Performance of the investment itself must be secondary to the regulations.  It's more important to lobby government about regulations than it is to have a well performing investment fund.  If the scheme is compulsory, meaning it's against the law not to participate, market failure becomes absolute.

It doesn't matter if the fees are high - it's against the law to stop giving them money.

It doesn't matter if their fee disclosure is poor - so long as it meets the regulations.

It doesn't matter if they loss money on your investment - you still have to contribute to a government apporved fund next month.

It doesn't matter if their service it crap - that's not in the regulations.


Example if you're interested:

When my wife and I moved to Australia we already had employment insurances in place to cover us if we couldn't work because of injury etc.  When we arrived in Australia the policies still have over 6 months to run and were valid even though we were then working in Australia.

Turns out in Australia they have government compulsory insurance called "Workers Compensation".  I had a heated argument with a lady from Zurich Insurance because I considered the quote for the insurance to be poor - in that the benefits were low and cost was very high.  My wife, an accountant, did a comparison to establish she thought the cost to benefit ratio of our current policy was something close to 3-4 times higher than the one Zurich was offering.  What was Zurich's response do you think?

It doesn't matter, you have to get it anyway - it's illegal not to.


I have some thoughts that might help the KS investor who wants to keep their fees low. 

The fees charged by the default providers of KiwiSaver are required by law to be at a "reasonable" level.     This is comforting - and regulators *do* understand the fees so the public doesn't have to  - but...

1  - The legal control on fee levels only really applies to the funds that people are automatically enrolled into.  That's 6 funds out of the several hundred fund choices out there.   Your provider may entice you into other fund choices on the premise that long-term returns in actively managed growth funds will add value over time.   This may or may not turn out to be true (no-one knows!)  - but  those other funds choices can be *way* more expensive.  This fee difference is disclosed.

2 - Have you ever tried to actively join a conservative, low-fee KiwiSaver default fund?  You may well be put in touch with an Adviser that enrols you into a different KS scheme but with the same provider.  To all intents and purposes it all looks the same, but it isn't.  Look at the fees.  It is all disclosed.    

The thing is, the default providers that use these tactics always disclose everything and
cover their behinds.   This gives the investor no basis for complaint later on. 

We click the "I Accept" button on internet shopping sites - but it should actually say "I'm sure it's fine".   We tend to trust large organisations.  

My view is default providers who do this kind of thing are acting against the spirit of the legislation, which is to keep fee levels reasonable.    It's not Crime of the Century, but it is a little bit murky and tells you a great deal about what they think of their customers.