Why does it matter?
This is the final part of my KiwiSaver series looking at just how important low fees are for your KiwiSaver. Choosing a low fees, passive KiwiSaver provider could end up adding thousands to your retirement balance by the time you retire. This is advice I personally follow.
Firstly, lets recap:
In the first blog we looked at all the free money you get just for being a responsible saver.
Then we broke down which type of funds is the best I found was the best for me.
Now lets look at how most KiwiSaver providers are overcharging us with their high fees.
If you are not convinced KiwiSaver is a great investment go back and read the earlier posts!
Okay, I’m convinced KiwiSaver is a great investment. But which provider?
There are two key differences between each KiwiSaver provider and they make the difference between a great investment and a disappointing one. These are annual returns and fees. It is difficult to chose a KiwiSaver provider based on their annual returns because you only know a winner after they have won. If you switch to a KiwiSaver fund that has the highest returns in the last 5 years then you are likely ‘buying high’. It is better to find a provider that suits you and stay with them.
Active vs passive funds
There are two types of funds. Active funds pay expensive fund managers to pick individual companies to invest. On the other hand, some KiwiSaver funds invest into whats called index funds. When you invest in these funds you get a share of lots of different companies (an index) which are listed on the stock-market. For example, a popular index ,the S&P500, is made up of the largest 500 companies in America. Closer to home, the NZX50 is the largest 50 companies in New Zealand (see the graph below). Because there is less buying and selling, these are called passive funds.
As a rule of thumb, few active funds will ‘beat the average’. Less are able to beat it consistently. Index funds invest in the market (or most of it) and get the average.
It is usually only possible to spot the active funds which will beat the average after they have done it. By then, its too late.
The importance of low fees
The other point of difference is how much the KiwiSaver provider is charging you for managing your money. These fees can vary hugely and can have a big impact on how much money you end up with in retirement. Simply put, fees are a big deal.
For example, if your active KiwiSaver fund returns 7%, but you pay 1.3% in fees, then you have only really made 5.7% (meaning 18% of your returns are lost).
Meanwhile, a passive fund might still return 7% but charge only 0.31%, resulting in an annual return of 6.69% (now only 4.4% of your returns are lost as fees)
Obviously, the active fund could beat a passive fund through clever trading and earn more (say 8%). Post fees, that would still be the same as the passive fund (6.7%). This essentially is the competition between passive and active funds – do the active funds earn enough to justify their high fees.
Of all growth funds in New Zealand, KiwiSaver provider Simplicity has the lowest expense ratio of 0.31% per annum. The next closest is ASB with 0.67%. As mentioned before, the average is 1.3%.
Okay, so low fees are important. But please, show me another graph
Let’s compare Simplicity’s Growth fund to the average growth and conservative KiwiSaver fund from the last post.
Based on an average wage in New Zealand of $57,000, with 3% contributions, a Simplicity’s Growth fund would return about $705,000 versus $533,000 in an average Growth fund over 40 years. This is assuming both funds return the same percentage return each year (7%). That is a pretty critical assumption, and there is some debate as to whether or not active funds earn a high enough return over passive funds to justify their extra fees. You should seek financial advice to make sure you are in a fund that is best for you.
My personal experience
I changed KiwiSaver to Simplicity in October and have been very happy with the experience.
As proof that I practice what I preach, here is a screenshot of my returns since joining Simplicity in October last year (the whole process took about 10 minutes).
Please, one more graph. A comparison between 3, 4, 8% contributions if you could
Just for interest, I’ve included this graph below, showing what your KiwiSaver balance would look like at the end of 40 years based on changing your personal contribution rate. Obviously, I have modeled this on choosing Simplicity’s Growth fund.
The best thing about KiwiSaver is that it is taken from your wages/salary before you are paid into your bank account. Psychologically, this makes it easier to cope with the extra savings as you don’t feel like you’ve made a sacrifice.
Maths behind the graphs
All the following graphs are based on the following assumptions:
Conservative Fund: 0.85% annual fee + $27.25 account fee. 3% annual return.
Growth Fund: 1.3% annual fee + $33.92 account fee. 7% annual return.
Simplicity Growth Fund: 0.31% annual fee + $30.00 account fee. 7% return.
These annual and account fees are from the averages listed on sorted.org.nz.
Personal contributions of $1710/2280/4560 per year for 3/4/8% respectively.
Employer contributions of $1710 – tax per year.
Government tax credit of $521.43 per year.
I have ignored other taxes and inflation in these models.
Navigating the minefield of different KiwiSaver providers, funds, fees, and contributions etc is difficult. I hope my three blog posts have been useful.
Any comments are welcomed below or find me on Facebook. Or, if you have anything you would like investigated, feel free to let me know.