Slow bleeding in KiwiSaver

Personal Finance

How to protect your young ones from financial vampires and a long slow bleed in KiwiSaver

21st Feb 12, 1:08pm by Amanda Morrall

By Amanda Morrall (email)

Dear readers;

Thank you very much for sharing your stories of financial vampirism.

I thought I would share with you a horrifying true life tale that landed in my inbox. This one relates to fees paid on a junior KiwiSaver account that has been losing money ever since inception and with fees at the higher end of the chart.

First the email:

Yes, you were correct, fund managers seem to be among the biggest of vampires. When Kiwisaver first started I enrolled my two daughters with the thought of getting them onto the Kiwisaver ladder early with my chosen Kiwisaver fund. Little did I know that in reality I was only lining some one else’s pocket with any returns they may make.

The latest statement (Feb 2012)shows just how much blood they suck.

Total contributions $ 1040.00 (all govt)

Account Balance      $ 897.18

Simple return since inception -13.7%

Fees incurred so far: year end 31/3/09    $29.12

                                                             31/3/10    $49.92

                                                              31/3/11    $49.92

                                                              31/3/12    $49.92 (probable guess)

So to sum up. A loss of $150 ish and still charged fees paid of probably about $180 ish.

This is a grim story to be sure. I can't decide what's worse, those exorbitant annual fees or the poor performance. I am guessing that the fund is of an "aggressive" nature in exchange for those above average fees. I confess, I also put my kids into a growth fund that has also gone backwards since inception. (Here's a story I wrote about it awhile back. My apologies for any confusion at the time writing about member tax credits applying to under 18s; they don't.)

For the benefit of other junior victims out there, check out our balance estimator calculator below which shows how long it could take to lose your kick-start without putting in any additional contributions, and with fees and negative returns stacking up.

A reader kindly pointed out that Westpac does not charge fees on its junior KiwiSavers provided they have a savings account with them which is laudable. If there are any other providers that do this I'd love to know about them.

In the meanwhile, I am in search of more true life tales of financial vampires, in particular those relating financially lecherous partners, tax horrors and insurers.

Please email me directly at amanda.morrall@interest.co.nz

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19 Comments

by laurence | 21st Feb 12, 1:59pm 1329785953

Well done conscripting your children into this scheme. They will curse it in future as there is no way out and they are condemned to the fees and poor performance forever. Let’s hope they remember and the IRD allows them to take rollover holidays thru there working career else they will be condemned to pouring a significant slice of their earnings into this scheme as well.

A good question is do you continue to incur fees once your balance has slipped below zero? You cannot close the account so I would be interested in this little pearler. Also remember that Kiwisaver is part of your estate and can be taken by creditors. Any balance (loss) will probably go against your estate.

by Miss Astrid | 21st Feb 12, 2:15pm 1329786934

I decided as my kids were under 18, (13 and 11), I had no right to legally bind them into a scheme that they currently have no understanding of nor capacity to understand.

KS requires them to contribute their own income. Everyone should come to their own decision regarding their own money.

by midgetkiwi | 21st Feb 12, 2:52pm 1329789122

I got one of those phone calls asking if i wanted to enrol my kids in Kiwisaver, and the above is the reason i declined. without any contributions, a savings account balance will increase, albeit decrease due to inflation.

With Kiwi "saver", I could not find a way that it would increase without contributions, even from very low fees. what a waste of a kickstart from the government. Has anyone with no contributions in a kids account actually increase at all?

by printer8 | 21st Feb 12, 3:39pm 1329791961

A workmate recounted a similar story. She opened a KiwiSaver account for her son with a bank as provider. On the recommendation of her mortgage broker, last July she transferred to a higher risk fund with a non-bank provider. She and her son were concerned that his initial investment was now “only $700”.

While not having all the detail, this concerns me on a couple of accounts. Firstly, that an advisor suggested that this should happen at a time when markets were in turmoil; makes me question as to whether the advisor received a fee or not. Secondly that markets fell approximately 15% but this showed a decline closer to 30%.

I raised a concern on your site some time ago of the low return on ASB’s KiwiSaver Bank Deposit fund. Some weeks later an ASB spokeswomen defended this in the Sunday Times by saying that the important thing was that such funds attracted government subsidies; “No”, it is not important at all whether I get a government subsidy or whether I won the money in Lotto – the important thing is that fund managers need to ensure a satisfactory return.

Regardless of this, it is hard for a twelve year old (and his mother to whom $300 is also a lot of money) to see his fund reduce by nearly $300. The financial sector wonder why Kiwis invest in property rather than financial institutions. I suspect that KiwiSaver is the first experience that many Kiwis have in investing in funds and as such they have a vested interest in ensuring that they are treated fairly.

by iconoclast | 21st Feb 12, 5:40pm 1329799257

some basic rules - did your workmate do any of this

this article has disappeared http://9am.ten.com.au/tips-for-good-financial-planning.htm

Shop around. The first 1 hour consultation should be free.

Interview a number of financial advisors.

Don't pay a fee for this as it is interviewing the services offered, not asking for financial advice.

Check the adviser is licensed.

Ask for a financial services guide. (This should outline their services, and fees)

Ask if they are independent and not a member of a dealer group.

by printer8 | 21st Feb 12, 6:25pm 1329801925

You are correct in your implied assumption – it is unlikely that she did any of the above. Yes any financially literate person would have and should have done this.

However, the key point is that many KiwiSavers are investing in funds for the first time and are not financially literate and therefore are unaware of the recommended actions that you suggest.

While you can say “tough bickies”, that is their problem, I think the financial sector needs to recognize this and that they have a vested interest in ensuring that KiwiSavers including children/youths have a positive experience. If that child had put his money in a conservative fund, the reality is that he would still have lost money as fees would exceed return; try explaining that to a 12 year old.

How many people out there for example understand that when they put their funds with ASB they are not putting their funds with ASB Bank, but rather a separate entity (ASB Investment Group) who then charge a fee to deposit funds with their parent company. Yes, I hear you say everyone should read the investment statement, however I suggest that investment statements are beyond the average KiwiSavers and they would not comprehend this.

Would the average KiwiSaver realize that some fund managers charge a higher percentage for managing the aggressive funds; however they do not invest directly in markets directly but simply place it with other fund managers who then clip the ticket as funds are probably lodged with other fund managers. Does this warrant a higher fee?

Yes, markets of late have not been kind for aggressive funds, however I also question whether fund managers have really performed and if the average KiwiSaver really understands what they are involved in.

by iconoclast | 21st Feb 12, 6:57pm 1329803879

I'm not implying anything. I was a specialist consultant to a financial advisor for 15 years, and with each passing year became more and more disheartened by the advisory "industry" (I cant call it a profession) and the basic stupidity of the clientele.

Eventually I published a specific page on my web site offering guidance on how to deal with the machinations of the industry. Dealing with the daisy chain, from advisor to banks, to dealer groups, Fund Trustees, Fund Managers etc etc. And all the fees along the way. In any one year, that one page might be lucky to get 100 visitors. Absolutely no visitors from the Land of the Long White Shroud. Its been in the public domain for 5 years.

But dont feel lonely .. here is another excerpt.

The following from two articles by a New York Times Finance columnist who got suckered.

article 1 NY Times

article 2 NY Times

If you require financial advice then :

go to a fee-for-service financial advisor and obtain written advice or a written plan, then

go to an accountant and have it reviewed for soundness, then

go to another fee-for-service financial advisor and get a second opinion, then

execute the plan yourself, and

never allow the advisor to implement / execute / invest for you.

never give the advisor signing authority on your behalf

by Mark Hubbard | 21st Feb 12, 4:30pm 1329795010

There should be an immediate change to the rules to the extent children who have been put in KS by their parents are able to opt out on their 18th birthday if they wish (taking just their contributions, and any return).

Otherwise the State truly is enforcing the sins of the parents onto their kids. If I was a child and grew up to be sensibly Libertarian, I'd be more than miffed at being enmeshed even further into the State against my will when I wasn't even in a position to give consent.

As for tax nightmares, where would I start? Perhaps try here.

by Nic the NZer | 22nd Feb 12, 9:14am 1329855245

Glad to see an adverserial attitude is so constructive when dealing with the IRD. It's the underlying narrative behind the blade comics, the question of what happens when the Vampires manage to kill blade and cease to derive pleasure from the thrill of his constant threat to their very existance.

http://en.wikipedia.org/wiki/Blade_(comics)

by MiniMe | 21st Feb 12, 4:45pm 1329795938

I was considering putting our son into KS but declined based on the issues in the article. However I think Westpac has a deal where a customer who is a child and in KS does not pay KS fees i.e. we open a childrens account for them and KS and no KS fees. I decided it wasn't worth the hassle of dealing with another bank for the probably marginal returns.

by skudiv | 21st Feb 12, 5:05pm 1329797149

Whats missing from the calculation is how much $190 will buy in 15 years.

Having proven that kiwisaver exist only for the benfit of the fund managers, will we be given the option of quitting the scheme? Or is the only exit stratagy migration?

As a taxpaying non kiwisaver member, I am absolutley thrilled to be funding these fund managers. No doubt they will have a prosperous retirement.

by Waripori | 21st Feb 12, 5:05pm 1329797147

I enrolled our son in KS just before last years budget as I thought Govt might get rid of the 1k kick start which they did not do. He is now 18 and able to qualify for member tax credits so we will put in 1 k for him this June and he will get an additional $500 or so from the Govt. In three to five years he will get an additional $1,000 per year towards a deposit for a home. As his balance gets up a bit the minimum fee he is charged ( which is effectively about 5% on a 1 k balance will become less of an issue and in any event is more than balanced by the member tax credit.

If anyone thinks a fund manager is ripping anyone off by charging $50 a year to maintain a kiwisver account given all the compliance involved they must have a tooth fairy complex ( expecting money for nothing ).

It is dopy to put little kids into Kiwisaver but it was never designed for that.

by skudiv | 21st Feb 12, 5:10pm 1329797418

They are getting paid to grow the balance not shrink it. Tooth fairy or no, I would feel like a right tosser charging someone for losing money, while claiming this will help their retirement. It doesn't cost $50pa to put the money in a savings account, regardless of compliance.

by Hamish | 22nd Feb 12, 8:24am 1329852281

I have bail you up here. You talk about tooth fairy complex, expecting money for nothing, yet happily sign up your kids and take the kick start and tax credits?

by Black Celebration | 21st Feb 12, 5:41pm 1329799267

To be fair to the Government, this kickstart couldn't be more clear. The kickstart contribution sets you on your way, allows you to get going, gives you a boost to start you off. If you kickstart and do nothing else - eventually you will run out of fuel and the bike will stop.

However, KiwiSaver's great because you can transfer if your provider lets you down.

Most of those fees deducted in the example are probably from the set $ amount charged as an "admin fee". Naturally, the more you put in, the less the impact of those fees. If no more money is going in, then go with the provider that charges the least in terms of that set $ admin fee.

If you can't be bothered with the Westpac thing, I think Kiwibank's set admin fee is $1 a month. Based on a $900 fund, that should be an overall annual fee of about $20-$25 all up.

by MortgageBelt | 21st Feb 12, 10:33pm 1329816816

I enrolled all three kids into Kiwisaver when KS first appeared. Oldest child has now finished university, and through her part-time jobs contributions since high school her $1000 kickstart + extras has grown to $3000 or more. I'm sure she never missed the 2 or 4% contributions. She will be eligible to use a portion towards a first home. She can apply for a 1 - 5 year holiday anytime for any number of times.

Youngest still has the $1000 + another 50 or so as Westpac waive fees as has bank account as well. His cashfunds has had not bad earnings.

Middle child working in Australia - he can now cash his KS out and transfer to Aus (less Govt contr?) .

No complaints so far from any of them. Of course deep hidden memory counselling in the future may reveal problems stemming from parents forcing KS on them!

by KH | 22nd Feb 12, 9:07am 1329854857

One of the unintended but great benefits of Kiwisaver is that it will raise literacy. Gradually over time, especially when people get a few thousand in their account they will take notice of what happens and act accordingly.

It won't be everybody and there are still going to be naive people about. But the article above is one of the many signs that New Zealanders are starting to wake up. Finacial Services industry and advisors look out !

by KH | 22nd Feb 12, 9:12am 1329855160

A lot of the problems described above, which are real problems to be sure, are not problems of Kiwisaver as such. They are problems we have had for decades with a looting mentality in the financial services industry and an advisory approach that is immoral. Long before Kiwisaver existed.

by yet another account | 22nd Feb 12, 9:47am 1329857254

Note that the spreadsheet is still broken: it doesn't produce useful numbers, especially not if used as shown in the screenshot (I pointed this out the last time it was used, but nothing seems to have been fixed - Amanda, send me an email if you want details)