The Financial Markets Authority (FMA) is cracking the whip on KiwiSaver funds which charge unreasonable fees and give poor value for money.
The FMA has told fund providers they must review fees, justify them, and report their findings every year.
Fund manager fees have been a bone of contention for the FMA, which has released numerous reports highlighting high fees compared to similar funds overseas, no clear link between fees and a fund's performance, and bigger providers with scale failing to pass on savings.
FMA director of investment management Paul Gregory said it was not telling managers what to charge.
"But the guidance also recognises investors are paying the cost and taking the risk and if high fees mean investors are not getting an appropriate share of the profit, the manager's competence is far less relevant, and investors should walk away," Gregory said.
Market forces might eventually drive out underperforming managers, but the FMA wanted changes in behaviour sooner, he said.
"The long-term nature of most investing means New Zealanders can be punished for long periods, perhaps irretrievably, before the market ever gets around to doing something."
That was not helped by most people's poor engagement with their KiwiSaver investments, he said.
The market watchdog had a range of actions it could take if it found fees were unreasonable, such as naming and shaming providers, preventing a scheme from taking on new members, fines of up to $300,000 and even court action.
Gregory said he hoped it would not have to take such strong action.
The FMA's guidance asked KiwiSaver providers to ensure their services provide value for money, share the value that is created with investors because they wear the risk, make sure advice to investors is received - not just offered, and to evaluate themselves as they would an underlying manager.