Last year, Kiwis paid about $340 million in KiwiSaver fees, but who knows if it was a good deal? David Boyle from The Commission For Financial Capability says changes to our annual statements should make it easier to understand what we are paying for.
When your KiwiSaver annual statement lands in your letterbox, or inbox, you'll notice something different this year - and it's a change I hope will encourage all of us to pay a little more attention to our KiwiSavers.
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For the first time the fees we pay our KiwiSaver fund manager will be shown in dollar figures, when in the past we may have seen it as a percentage. This could come as a shock - many people have no idea how much they've been paying in fees each year. For example, if you have $10,000 in your account you might have seen your fund manager's fee expressed as around the average of 1.28 percent (if you can find it at all, as until now there's been no requirement to show even the percentage cut). From April 1, providers will have to show that fee as $128 per year.
In most cases fund managers charge different fees based on the fund you are in, and the management style they offer. According to the KiwiSaver Fund Finder tool on the Sorted website, fees on $10,000 in a balanced fund currently range from $52 to $174 per year, depending on which provider you're with. That's quite a big difference.
The variation is due to your KiwiSaver provider charging their management and administration fee as a percentage of your total balance, and those percentage fees vary between providers.
This might get KiwiSaver members asking the question - what am I paying for, and am I getting value for money? This is a fair question that, in my view, needs to be better explained by providers.
When you are young and your balance is relatively low the fees you pay might not seem like much, but as you get older and your balance grows, that percentage cut takes a lot more out in dollar terms. The provider mentioned above who makes $128 a year on a $10,000 balance by charging a fee of 1.28 percent, will make $256 when your fund reaches $20,000, $640 when it gets to $50,00, and $1280 when you reach $100,000. That's a lot to be paying in fees over the course of your working life, until you can withdraw the money from the age of 65.
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I hope that when KiwiSaver members see their KiwiSaver annual statements this year, and start doing a few comparisons like I've made above, it will start a move to get providers to be more competitive in how they charge fees in the future. They could do this in a number of ways. They could cap fees at a dollar amount once your KiwiSaver balance reaches a certain level, or fees could be "tiered" based on your fund reaching milestones, eg, they might start at 1.28 percent but reduce to a lower percentage once you hit $30,000, and lower again at $80,000. Or they could offer other services that might help their members' long term financial outcome, such as access to free advice.
I believe that as KiwiSaver balances grow, there will be increasing interest among KiwiSaver members to understand where their funds are invested, and to ensure they're getting results that are right for their individual circumstances. No one minds paying a bill if they feel they are getting value for money. While fees shouldn't be the only reason to choose a fund or provider, they are something that you can now see more clearly, and they will have an impact on your overall return one way or the other.
But before you start hassling your provider about what you're paying for, there are a few things you should do first:
- Make sure you're contributing regularly. You might have suspended your payments when times got tough, or withdrawn your full balance to help buy a house, but have you started contributing again? The earlier you start the greater the impact interest will have on your overall balance - Albert Einstein was quoted as saying compound interest was the "eighth wonder of the world".
- Make sure you're in the right fund for your stage of life and personal circumstances (conservative, balanced, growth, aggressive). The different fund types each have a different mix of low risk and high risk investments, such as shares, property and bank bonds. Your fund's mix will largely determine your overall return.
- Make sure you're receiving the "Member Tax Credit", a goverment contribution of 50c for every dollar you put in up to $521 per year. You only have to pay in $1042 per year to receive the full amount.
- Make sure you're on the right Prescribed Investor Rate (PIR) so you're not paying more tax than you should on your investment returns.
Once you have checked all that stuff, you can then look at how your provider and fund is doing compared to all the others. You can do this really simply head here to our KiwiSaver Fund Finder tool on our Sorted website. It will help you compare services, fees, and most importantly the return after fees - because there is no point paying lower fees but getting a lower net return.
David Boyle is general manager for education at The Commission for Financial Capability