Money

KiwiSaver fees

Updated: 09 Jun 2008
Kiwisaver-fees-hero

Introduction

KiwiSaver is a world of confusion to employees, employers, financial advisers, and even those running it. We're confused too.

While employees can simply sign up to KiwiSaver and be allocated a default provider and a default scheme, those looking to make an educated investment face a big challenge. There are 33 scheme providers and over 170 managed funds to choose from. How do you compare them?

For more information about KiwiSaver see our free website www.consumersaver.org.nz.

Comparing fees

Kiwi savings bank

Comparing KiwiSaver schemes on the basis of fees is nearly impossible.

Our latest review of KiwiSaver fees (at www.consumersaver.org.nz) shows many companies charging an administration fee, management fee, trustee fee, and monthly membership fee - all for different percentages or values. Most schemes have confusing and imprecise fee information, peppered with disclaimers and loopholes.

For example ASB's investment statement says it "may charge certain other fees such as entry fees, exit/transfer fees, switching fees, contribution fees, transaction fees, custodial and advisor fees". It also says that it can alter the trustee fee at any time and that "there is no maximum to the Adhoc Expenses".

"Reasonable" fees

As a matter of fact there is a limit to how much the fees can be amended, although no-one's quite sure what that limit is. The fund manager can change the amount of fees it charges at any time, as long as it tells the Government Actuary (the regulator of superannuation schemes). But the fees can only be changed to an amount deemed "reasonable" by the High Court.

If you don't think your fees are reasonable, you can complain to the Government Actuary (who's part of the Ministry of Economic Development). If that fails, you need to apply to the High Court - where it costs $1100 to file a claim and lawyers charge hundreds of dollars per hour. You also face the very real possibility of paying the defendant's costs if you lose. In short, challenging the "reasonableness" of your fees is nearly impossible if the Government Actuary doesn't agree with you.

Even financial advisers find it tough to work out KiwiSaver fees. Robert Oddy Managing Director of International Financial Planners Limited says: "You have this myriad trail of fees being attached to investments. It's an approach that's difficult for investors to unravel, and it's difficult for us too." He says more streamlined investment strategies are preferable because they go through fewer sets of hands (and therefore incur fewer fees).

Robert Oddy also says that the lowest fee level should not become the only reason for selecting a fund manager - the qualifications and experience of the investment team, and a fully diversified investment portfolio are equally important. If you're unsure, be prepared to pay a fee for the advice - and do ask the adviser to explain why his or her advice can work for you.

Taxes on fees

IRD logo

Most funds charge a fixed dollar amount per month and then several other fees as percentages of the gross or net asset value of your account. Some include GST and others don't. Net, gross, GST? So it appears that tax is a factor in how much we pay in fees.

We asked IRD what taxes applied to the various fees that KiwiSaver funds charged.

IRD told us the Ministry of Economic Development was responsible for that area of KiwiSaver. But the Ministry of Economic Development told us no, it was indeed IRD that was responsible. With IRD now agreeing to answer the question, we plodded on.

IRD's initial investigation bore no fruit so it was referred to its "experts". A month of expert analysis later and we were told that "we still can't get any answers; no-one at this stage is willing to commit to answering that question".

We asked IRD: "If you don't know how taxation applies to the fees then who does?"

Finally ... an answer

IRD finally told us that GST wasn't charged to individual members and the only other tax is Investment Tax - 19.5 percent or 30 percent depending on your financial situation. It took IRD more than three months to figure this out.

However, the investment statement for Fisher Funds Growth KiwiSaver Scheme says "plus GST" under custodial and other administration fees but says "no GST is currently payable" under the Trustee's annual fee. It's little wonder that investment statements are peppered with statements such as "if applicable". If IRD doesn't know, how are fund managers supposed to?

Robert Oddy, Managing Director of International Financial Planners Limited, says there's huge confusion surrounding KiwiSaver and he's concerned at the lack of financial education. "When you see some of the packs sent out by providers, there's absolutely no information that can help people. It's very hit and miss." He admits that in the absence of getting enough information from providers, it's difficult for advisers to say which scheme it's better to go with.

Comparing returns

Sinking piggy bank

Comparing scheme providers on the basis of their returns is similarly difficult. Returns are not guaranteed and many schemes have little historical data to help guide you.

Our review of 13 managed funds over the last 10 years showed an average return of just 3.66 percent per year. These results on "balanced" funds (net of fees and taxes) are hardly better than inflation. In most cases, investors would have made more from putting it in the bank which has much less risk attached.

Large losses

As for the actual KiwiSaver returns so far, the Sunday Star Times recently published figures showing some KiwiSaver funds have made losses of up to 20 percent. It also said that "only 27 of the 132 KiwiSaver funds are in positive territory six months after they started investing". Not only have many KiwiSaver investors suffered large losses; they've also been charged fees by fund managers for this exceptional investing.

Where the scheme has invested has been an important factor in the level of returns so far. Some 14 scheme providers - including some of the big-name fund managers and default scheme providers - that have invested mostly in property and shares "growth" funds have lost more than 10 percent in the last six months. Conservative funds investing primarily in cash, bonds, and fixed interest have tended to do better (or for some in the current investment climate, lose less) than higher-risk growth funds.

As Robert Oddy, Managing Director of International Financial Planners Limited, says, "One aspect many people fail to understand is that investing involves risk. There's always a risk of a loss. By spreading your investments, you help minimise the impact of any loss that may occur. If you select a fund manager who has a narrow range of investments, then perhaps that's not the best approach".

With only six months of operation under their belts, and with so many scheme providers losing money, comparing providers and funds on their returns at this stage is near impossible.

IRD to the rescue

The silver lining to the dark cloud of KiwiSaver's woes is that IRD's poor administration and delays in forwarding money to scheme providers has actually protected some members from losing money.

While IRD is supposed to hold employee contributions for three months, in some cases this has taken a lot longer. And IRD pays around 5 percent interest while holding this money. So while most schemes have been losing money, those with contributions trapped in IRD have made one of the healthiest profits to be found in KiwiSaver.

The KiwiSaver experience

We asked ordinary KiwiSaver investors about their experience so far. Most had selected their scheme provider or plan (or both) based on personal preference or advice from others.

But the majority seemed completely apathetic as to what returns they were making or the fees they were being charged. Only one knew the fees being charged.

Few knew or seemed the slightest bit interested in the returns they were getting - as one of them said: "It's very easy to be blasé about your KiwiSaver investment. Once you get used to receiving 4 percent less in your pay, it's easy to forget that you have an investment to monitor."

If this level of apathy is representative of New Zealand's KiwiSaver population, we can only repeat the adage that a fool and his money are easily parted.

What's been said in the media

"Conservative funds will be ditched for higher-risk options as KiwiSavers adopt a more hands-on approach to investing in the scheme, say major providers". NZ Herald 9 May 2008.

We note: Higher-risk "growth" funds with many providers have suffered the biggest losses to date. Many with KiwiSavings in these funds have lost around 10 percent, while others have lost as much as 20 percent or more.

"Knowledge of the public as to who their provider is is minimal, absolutely minimal. This is a real concern. You might as well put your financial future in the hands of an investment company whose name you pull out of a hat." Gareth Morgan, NZ Herald 9 May 2008.

We note: Around 50 percent of KiwiSaver investors have taken a default provider and default scheme.

Our view

  • Consumers with little or no investment knowledge are being presented with confusing information that's lacking in useful detail. Both the government and the investment firms are guilty of this.

  • We are concerned that people are being persuaded into putting their money into something they don't understand and that gives them no guarantees. No KiwiSaver fund is government guaranteed.

  • The fees structure of many managed funds is largely unclear and unfathomable to ordinary investors, and even financial experts. Scheme providers need to help educate their investors about fees and investment strategies, not keep them in the dark.

  • IRD and other KiwiSaver regulators must demand that KiwiSaver fund fees are more transparent and simple, and that providers present their information more clearly. Without this, individual KiwiSaver investors can't make informed decisions about their life savings.

  • Look carefully at where your money will be invested and consider the level of risk you're willing to take. Funds investing in shares and property have a higher risk attached to them than those investing in cash, bonds and fixed interest.

  • If you haven't joined a scheme yet, don't rush into a decision. Take the time to talk with an independent financial adviser, do your homework and find out as much as possible about the fees, returns, and investment strategies of a particular company. Ask the fund manager for the past three year's performance figures for the funds into which they will invest your savings.

  • If you find it difficult to extract this information from a fund manager, go to another one who will provide it.


More information


Report by Marc Wendelborn