Last year Kiwis paid over $80 million in KiwiSaver administration fees, in an environment that produced negative investment returns to the amount of -$820.9 million, according to the Financial Markets Authority (FMA) 2020 Annual KiwiSaver Report.
"We don’t think that’s right," says Mike Heath, General Manager of InvestNow.
"Some investors paid fees on their KiwiSaver balances but experienced a negative investment return. How is the $62 billion-dollar KiwiSaver industry justifying this?" asks Heath.
In dollar terms, the typical fixed KiwiSaver administration fee (generally ranging from $20 to $36) might not seem like much, but to the average KiwiSaver account balance (just over $20,000 according to the FMA’s report) this can be a significant detriment on an annual basis when paired with fund charges.
What are KiwiSaver admin fees?
KiwiSaver administration fees, sometimes referred to as member fees, are a fixed-dollar expense deducted from KiwiSaver members’ accounts, typically on a monthly, six-monthly or annual basis.
As member KiwiSaver balances were small to begin with, fixed fees were introduced by providers at the birth of KiwiSaver in 2007 to recoup some of the costs of putting in place the infrastructure necessary to administer their KiwiSaver schemes.
Recognising the cost of this expense, the Labour government implemented a $40 annual fee subsidy to KiwiSaver members to reduce the overall cost to members, and also as an incentive to participate in the fledging retirement savings scheme.
The subsequent National government dismantled the $40 yearly top-up, but by this stage the administration fee was fully established and the burden for this expense was now passed firmly to KiwiSaver members to pay.
More than ten years has since passed and average KiwiSaver balances have continued to increase in value, so the rationale for having this fixed-dollar expense must now, surely, be questioned.
The true cost of KiwiSaver admin fees to the average $20,000 KiwiSaver account balance For someone in a low-cost KiwiSaver Scheme with an advertised management fee of 0.31% p.a., a $20 annual membership fee (admin fee) bumps the actual fees up to 0.41% p.a.
As the table below shows, fixed-dollar admin fees dramatically increase the total percentage fee (the figure typically used for marketing purposes to represent management fees) paid by KiwiSaver members.
The table illustrates the total paid by KiwiSaver members of the fixed admin fee on both a low-cost and high-cost scheme for the average $20,000 KiwiSaver member balance.
“Eventually, fixed KiwiSaver admin fees should die out across the industry as regulators increase the pressure,” says Anthony Edmonds, Founder of InvestNow.
A highlighted area of concern by the FMA
The FMA highlighted some areas of concern in KiwiSaver, notably the relatively high level of fees compared to the growing size of funds under management.
While income from KiwiSaver administration fees did fall slightly compared to recent years prior to 2020, the FMA’s 2020 Annual KiwiSaver Report notes KiwiSaver fees have yet to reflect the ‘economies of scale’, considering the KiwiSaver market now totals $62 billion.
"Bigger KiwiSaver balances mean KiwiSaver providers are collecting more via percentage-based fund charges than ever before. So, why are admin fees still being charged?" asks Edmonds.
The InvestNow no-admin-fee approach to KiwiSaver supports the FMA’s proposed guidance on KiwiSaver fees published early in November 2020.
Under the FMA proposal, KiwiSaver schemes will have to explicitly justify fixed annual member admin fees, with the regulator noting the disproportionate impact such charges have on low-balance accounts.
According to the FMA, KiwiSaver Schemes will have to regularly review fees in light of factors such as growing member numbers and higher average account balances. While they fall short of suggesting they would ban fixed member admin fees outright, the draft guidance strongly hints that providers should not automatically tack on these charges based on historical practice.
The next fee battle – incorporated 'advice' fees
Removing fixed admin fees offers the most obvious rout to improving member outcomes (more dollars in members pockets), but the FMA’s proposed guidelines highlight another insidious KiwiSaver cost that deserves attention too.
The FMA is pushing for 'advice fees', if charged, to be charged and disclosed separately as opposed to incorporating such fees into KiwiSaver management/performance fees.
"Currently, several KiwiSaver schemes embed advice fees in general administration expenses, meaning all members carry that cost regardless of whether they have received advice or not," says Edmonds.
Edmonds also notes many KiwiSaver members would undoubtedly benefit from financial advice, but it’s fair that those wanting advice, explicitly pay for that service (and receive what they’re paying for), while others don’t get charged a fee for a service they haven’t used.
"As KiwiSaver continues to grow and member balances swell, costs should fall without extreme regulatory intervention, as providers naturally compete harder on fees, service levels and quality of investment solutions," Edmonds predicts.
Nonetheless, the FMA proposed guidance on member admin fees and advice charges point to some positive changes ahead, bringing the KiwiSaver market up to the standards that the InvestNow KiwiSaver Scheme has set from day one.
How to assess your current KiwiSaver fee situation
The best place to find the fee information for your current KiwiSaver Scheme, is to go directly to your KiwiSaver Scheme’s Product Disclosure Statement (PDS).
KiwiSaver providers generally tell you where to find their PDS in all associated advertising/communication sources, so you should be able to go to their website and find it pretty quickly. Alternatively, you can search for it on the Disclose Register.
Disclosure: The issuer of the InvestNow KiwiSaver Scheme is Implemented Investment Solutions Ltd. For a PDS please go to www.investnow.co.nz/kiwisaver
This article was created for InvestNow