KiwiSaver fund fees high and not justifiable, say researchers

Tuesday, 5 September 2017

Ayesha Scott said it was not helpful to have providers telling investors that fees were unimportant.

Researchers have criticised the country's biggest KiwiSaver provider ANZ's claim that a growing focus on fees is a problem for the retirement savings scheme.

ANZ said this week that its research showed younger people were particularly worried about choosing funds that would keep their fees low, even if that came at the expense of returns.

Fees are the one thing that is guaranteed about your KiwiSaver investment.

'This trend is a concern, as choosing a fund solely on fees means members may miss out on greater returns and a larger balance in the long term,' the investment team said.

'This issue is emphasised when considering the impact of compounding returns, as higher returns should compound at a higher rate.'

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It said investors should focus on the return funds offered after fees.

But Ayesha Scott, a lecturer in finance at AUT, said research showed that over 10 years or more, managed funds would all end up with roughly the same performance. She said that made fees more important.

A paper by her colleagues Bart Frijns and Alireza Tourani-Rad said KiwiSaver funds' fees were above international standards and not justifiable given their 'relatively poor performance since inception'.

'Provided people are comparing apples with apples and comparing the fee structure of an aggressive fund with other aggressive funds and conservative funds with other conservative funds, they should in almost all cases - without delving into personalised financial advice - end up better off in the long-term through choosing a lower fee structure,' Scott said.

She said it was still important to choose the right type of fund for an investor's risk appetite. Someone who needed access to money within a couple of years to buy a house would need a more conservative investment option than someone who was saving for retirement a long time away.

Over time, the higher-risk option should deliver better returns.

She said KiwiSaver members could not bank on good returns continuing into the future, but they could opt for an investment that cost less, potentially increasing their retirement savings to the tune of tens of thousands of dollars.

Scott said the way funds were run would affect how much they charged.

'Ultimately they are businesses and they need to pay their employees. Their fee structures reflect that. Whether or not you're getting much in terms of return for your fees is debatable. Some offer more in the way of service. Simplicity is very low-fee but it's very much a no-frills online service. It will have fewer overheads than some of the larger organisation with much larger offices.'