Opinion: KiwiSaver fees cost investors thousands, even tens of thousands over the lifetime of the investment

By Diana Clement

KiwiSaver fees matter. Fees can cost investors thousands or even tens of thousands of dollars over a lifetime of investing.

They’re a necessary evil. That’s because KiwiSaver funds are run by private enterprise and their income is sourced from the fees they charge.

Most KiwiSaver providers have one “headline” rate of fees shown clearly on their investment statements. That’s not the end of the story. The majority deduct other “hidden” fees and add-on “expenses” such as trustee, audit, legal and actuarial fees from the investment fund as a whole.

If you’re investing in a “fund of funds” type investment or where the manager uses sub funds, there will also be additional layers of fees in each sub fund, which are
masked in individuals’ KiwiSaver statements.

Even research houses struggle to collate and analyse information about providers’ fees and to verify their accuracy.

Investors need to be aware of the fees being charged by their fund. Fees can eat up investment growth and aren’t necessarily commensurate with the investment prowess
of the manager.

Despite low headline rates advertised by KiwiSaver providers, the average fee paid by investors is around 1.36% per year.

At first glance, it may seem insignificant, but as your KiwiSaver gets larger, those fees begin to matter. Some providers such as Gareth Morgan KiwiSaver and since December, the ASB, are more up front and transparent about what you pay.

Fees difficult to fathom

They’re in the minority, however. Unless you have a good working knowledge of the hidden fees and expenses, then information is pretty difficult to fathom. Even providers’ help-line staff sometimes don’t give a clear explanation. The majority of KiwiSaver providers also fail to report a clear picture of the fees in either their promotional material.

The good news is that Commerce Minister Simon Power is moving to make fees more transparent by changing the The Financial Markets (Regulators and KiwiSaver) Bill  so that every investor knows exactly what he or she is paying and can compare apples with apples.

The changes will be based on a Ministry of Economic Development discussion paper, and should ensure all providers report their fees, returns and asset allocations, in a set way, so consumers (and advisers) can compare like with like. The increased transparency should encourage providers to be more competitive.

As the funds grow in value, so do the providers’ profits. In theory, the fees charged should track down over time thanks to economies of scale.

Finally, although consumers need more transparency when it comes to fees, the issue shouldn’t be used as an excuse not to join KiwiSaver.

The government contribution to KiwiSaver will almost always be greater than any fees paid by investors, although that’s not a reason for providers to charge over the odds.

For more on fees, see Amanda Morrall's article on fees after the Savings Working Group argued for a single default KiwiSaver scheme to lower fees.

See also, Amanda Morrall's article on which funds charge the most fees and the least fees.

Also, see Sam Stubbs' views on fees.