Why You Shouldn’t Necessarily Choose a Fund Based on Fees

November 15, 2021

November 15, 2021

Every KiwiSaver provider charges fees in exchange for the service they provide investing your funds. Fees vary from one provider to another, as do the additional services they offer.

One marketing tactic used by KiwiSaver providers is to advertise “low fees.” But should low fees guide your decision when choosing a KiwiSaver fund?

Let’s have a deeper look at what “low fees” really means for your investment.

New default funds promise lower fees

Anyone who didn’t select a KiwiSaver fund when they signed up is automatically placed in a default fund selected by the government. Every few years, the government reviews default funds and legislates any necessary changes.

As of 1 December, changes to default funds will take effect. The new default funds will be balanced funds instead of conservative, exclude fossil fuels and illegal weapons investments, and have lower fees than many KiwiSaver funds.

How much lower will the fees be? The average fee for balanced funds is 1.26%. The fees for the new default funds will be:

On top of that, the new default funds won’t charge fixed fees, which stands to benefit members with low balances.

This all sounds amazing, but lower fees don’t mean higher returns. If your KiwiSaver fund isn’t working as hard as it can for you, low fees can be a pretty insignificant factor. It makes much more sense to choose the best fund for your circumstances to get higher returns, even if it means paying a bit more in fees - it’s all about getting the best value for the lowest fees.

Passive vs active funds and their fees

Your KiwiSaver fund is either passively or actively managed. What does that mean?

Passive investments track the market by investing in index funds. An index fund imitates a major benchmark such as NZX 50 or S&P 500. They are diversified and generally follow what the market is doing. It’s worth mentioning that investing in a passive fund means you don’t have much say in where your money goes, so you could potentially be investing in areas you find unethical.

Active funds are more hands-on, where your fund manager will pick and choose investments in an effort to gain higher returns. Active fund managers must be experts in analysing and monitoring the companies they have chosen to invest in.You have more say in what you want your money invested in by choosing a fund manager who will take into account your values and ethics.

When it comes to fees, passive funds are usually associated with lower fees as they require less expertise on the part of the fund manager. With active funds, there is greater risk and more involvement of the fund manager, so the fees are usually higher.

However, this isn’t always the case. A 2020 report by MyFiduciary Ltd found that while the overall trend is for fees to rise with more active funds, there was such a large range of fees charged that there wasn’t actually a significant relationship. They found that “one active Provider has the lowest fees in the market, whereas one ‘mainly passive’ Provider has fees that are well above the average level seen for active Providers.”

Why is there such a wide range of fees? Part of it comes down to the services covered by those fees. Some providers will provide education, advise on saving for a first home, regularly review your fund choice, and more. Others might not offer any of those services.

Whether you choose a passive or active fund, it’s important to know what services your provider offers and that it matches up with the services you need and the fees they charge.

Returns after fees is more impactful

We have seen that fees don’t necessarily correlate to how a fund will perform. It makes much more sense to look at the returns after fees

Returns are the money your KiwiSaver investment earns. Seeing the amount of returns you gain after subtracting fees is a better metric of performance for your KiwiSaver fund. You want to know that you’re getting a decent return for the fees you pay.

An article in Stuff from March of this year reported that investors in KiwiSaver cash funds were paying more fees than what they got back in returns. For one cash fund, an investment of $10,000 would have netted a return of just $1.60 while the fees would have been $82.40.

Cash funds carry the least risk of all KiwiSaver fund types and are meant to be an optional place to keep your funds when you intend to make a withdrawal very soon, so you wouldn’t expect high returns. But it illustrates just how much fees can impact your KiwiSaver balance, and how important it is to make sure you are in the right fund for you. More than 152,000 Kiwis are invested in cash funds for a total of over $2.8 billion.

How do you find out about your fund’s return after fees? Morningstar publishes quarterly reports that show returns after fees for KiwiSaver funds. Or, you can ask your provider.

Looking at a fund’s long-term performance regarding returns and how it measures up against similar funds is a better indicator of whether it is a good fund or not than simply choosing a fund based on fees.

BetterSaver guides you to the best fund for you

We are so tired of seeing KiwiSaver providers trying to attract customers based on low fees. Fees are just one factor in finding the best KiwiSaver fund for you.

At BetterSaver, we assess KiwiSaver funds based on their track record of performance, risk and volatility, ethics, and fees. Our Fund Finder Quiz let’s us get to know you so that we can match you to a fund that aligns with your goals, timeline, and values. Our algorithm factors in all of this when guiding you to choose a KiwiSaver fund.

Don’t fall for ‘low fee’ marketing tactics. Take five minutes to take the quiz and get matched up to a fund that is the right choice for you. It’s that easy.

Get expert KiwiSaver advice.

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