KiwiSaver - is there enough competition?
We actively search for the best price for everything from smartphones to electricity and internet services.
But research from Treasury suggests this does not seem to be the case when it comes to KiwiSaver.
Treasury staff member Andreas Heuser has written two articles looking at "Competition and KiwiSaver."
He says that the global financial services industry is one area where prices are "often not subject to the same pressures as other consumer goods. Funds management fees are one area where the fees paid have not changed, despite changes in technology and other innovations that ought to have lowered costs."
He says KiwiSaver fees are aproximately 0.87 percent per year. That has not changed much since KiwSaver was launched eight years ago.
It is about $87 on average, but will be much higher for adults who are making regular contributions.
The fees are important to think about. The more you pay away in fees the less you will have left in your account to compound and grow over the decades until your retirement.
Mr Heuser says the six largest KiwiSaver providers hold 86.3 percent of the market. The top three firms hold 26 percent, 19 percent and 13 percent of the market respectively.
"In theory, competition between KiwiSaver providers ought to be occurring on the basis of price (fees), performance (returns), customer service (to the extent this is demanded) and qualitative factors ('brand'/reputation)," he says.
"The effect of fees and also returns are what matters most for the balance saved at retirement and should be a high priority for consumers."
He looked at funds flows across 134 KiwiSaver schemes, managed by 17 providers. The date was sourced from Morningstar and FundSource.
His analysis found that the fees were not a good predictor of fund flow.
"This suggests that consumers are not attracted to join or change to a provider's fund based on fee levels. Fund flow was also not responsive to good or bad historic one-year investment performance."
So if fees and performance are not driving fund flow what is?
Fund size appears to be a major factor.
Mr Heuser says larger and bank-affiliated KiwiSaver funds are attracting a "disproportionately" bigger share of fund flow.
"KiwiSaver members also appear to be, on average, disengaged from their investment and uninformed about investment fundamentals."
He says relatively few people seem to be using the Commission for Financial Capability's FundFinder KiwiSaver comparison tool.
There are around 6,800 unique page views per month, compared to 88,000 for the Commssion's Sorted website.
The analysis of fund performance found it did not seem to be a major influence on fund selecton. This could be due to there being relatively little variance in performance among the biggest providers.
On the issue of fund performance it is worth noting that it is arguably a good thing that people are not switching funds based on past manager performance. That is because past performance is no guarantee of future performance.
Mr Heuser writes that "encouragement of switching funds based on previous performance is not a desirable policy outcome".
"The fact consumers do not appear responsive to fees and returns is possibly rooted in consumers' lack of knowledge and engagement about investment basics," Mr Heuser says.
Providers do spend some time educating their clients and fulfilling their regulatory obligations. But only to a point.
Mr Heuser writes that "any incentive to improve consumer knowledge levels is not aligned with the economic incentive to retain customers and revenue levels".
If a provider lowers their fees they may not be compensated for the loss of revenue by an increase in new customers.
Around two thirds of KiwiSaver investors have actively chosen a fund.
The research suggests several additional factors that might be influencing fund selection.
The research says that another issue is the way fees are reported. Fund management fees are generally expressed in percentage terms, rather than in dollars and cents.
The articles suggest that as KiwiSaver accounts grow in value there might be a change in people's attitudes to fees.
One reason for that is in the early days of KiwiSaver the balances were very low. A large proportion of the contributions came from the Government (the $1,000 kickstart and the $521 annual tax credit).
People are likely to have viewed the Government contributions as "free money." Behavioural finance studies suggest this money would have been viewed differently to the money contributed by the investor themselves.
Mr Heuser suggests that as the KiwiSaver balances grow (and the individual investor's contributions grow as a proportion of the total funds) people will start to pay more attention to not only the their KiwiSaver balance, but also to the fees they are paying.
A lift in consumer knowledge about the effect of fees on returns could then have an impact on the competition between providers.