The Commission for Financial Capability says the arrival of a new lower-cost competitor should shake up the KiwiSaver market.
But it also says that low fees are not the only factor investors should think about when they are choosing a fund manager.
Online KiwiSaver fund Simplicity launched yesterday, promising what it says will be the cheapest fees in the market.
The Commission for Financial Capability points out that in the nearly ten years that KiwiSaver has been operating the fees (as a percentage of money invested) have largely stayed the same, despite the funds under management growing to $33 billion.
The economies of scale achieved by larger funds should lower costs. But a report by Treasury last year found that total fees as a percentage of total assets fell from around 2.2 percent in 2009 to 1.95 percent in 2014.
While funds under management have grown to over $33 billion, investors have paid more than a billion dollars in fees.
The Financial Markets Authority says the arrival of Simplicity shows there is competition in the market. It says it is focused on "better disclosure and transparency around fees so that people can make well-informed decisions about KiwiSaver."
The Commission's Group Manager for Investor Education, David Boyle says "We think competition is good for the consumer and hence seeing a new entrant like this entering the market really does change the playing field."
He says the key with any investment is the return after all fees are paid.
But he says it that it is not just the fees that influence the outcome. So too does the investment approach taken by the fund manager.
The Commission says the main contributing factors to any KiwiSaver member's overall balance outcome is going to be:
Mr Boyle says anyone looking at joining any KiwiSaver provider needs to do a little homework first.
Some factors to consider include:
The Commission has developed a KiwiSaver Fund finder to help people compare fees and find out about a range of other aspects including returns, fund choices and other services.
The Commission says it believes it is very important with any investment decision to get some advice before joining or transferring from one investment product to another.
Binu Paul, who founded SavvyKiwi (an online subscription service offering advice on Kiwisaver funds) says there are three factors that will allow Simplicity to offer lower fees.
First, it has been set up as a not-for-profit venture, while its competitors are set up as commercial ventures.
Two, the scheme has adopted a passive approach to managing money. Mr Paul says passively managed products are typically cheaper - largely because the effort going into managing the money is limited to ensuring that the returns are as close as possible to a market index. "If done effectively, your returns will move up and down in line with the value of the index but trail by the amount of fees being charged."
Three, advances in technology will give the online-only fund more chance to reach a "scalable" level that allows Simplicity to achieve a sustainable business model.
Mr Paul says this should put pressure on other competitors to lower their fees.
But he cautions that the big funds operated by the banks will have an advantage because their existing client base gives them a "captive audience"
"But, I also believe as balances grown more and more Kiwis will be interested in what's happening with their money so low-cost offers will get attention."
"It is definitely time for incumbents to pay attention."
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