KiwiSaver Fees Explained - Why Chasing Low Fees Could Cost You More

KiwiSaver is one of the most valuable tools for Kiwis planning their retirement or saving for their first home. A frequent question we receive here at MoneyGuide is “Which provider charges the lowest fees?”

Focusing on provider fees often overshadows a more crucial aspect: performance after fees (net performance). Here’s why KiwiSaver net performance should be your primary consideration.

First thing's first, what are KiwiSaver fees?

KiwiSaver investment fees are charges that KiwiSaver providers deduct from your account to cover the costs of managing your investments. These fees typically include:

·      Management Fees: Covers research, analysis, and decision-making by fund managers.

·      Administration Fees: Account-related expenses like customer service, reporting, and record-keeping.

·      Performance Fees (if applicable): Charged when funds meet specific performance targets, often based on returns exceeding a set benchmark.

Lower fees mean paying less to your provider, but that doesn’t guarantee higher long-term wealth. When choosing the best KiwiSaver fund, it's important to look at the returns you get after fees.

For example, let’s compare two providers:

• Provider A: Has a 10% annual return but charges a 1% fee, so you end up with a 9% net return.

• Provider B: Has a 7% annual return with a 0.3% fee, resulting in a 6.7% net return.

Even though Provider B has a lower fee, you’d actually be better off with Provider A because their higher returns outweigh the cost of the fee. So, when evaluating KiwiSaver funds, focus on both the quality of investment management and the returns after fees to find the best option for you.

Types of management costs.

KiwiSaver providers that produce top returns typically require more work to operate and therefore often charge slightly higher fees. The two investment approaches that affect fees are:

Active Management Costs

Active management means fund managers are actively buying and selling investments to try and beat the market. They make decisions on which stocks, bonds, and other assets they think will perform best. This approach often comes with higher costs due to the frequent trades and the need for skilled managers.

Passive Management Costs

Passive management takes a more relaxed approach. Instead of trying to beat the market, it aims to match the performance of a market index by investing in the same assets as the index. This usually results in lower costs since there are fewer trades and less need for constant oversight.

When looking at fees, it's important to consider the full picture. From our experience, the top-performing KiwiSaver providers often have a balanced approach. They typically charge a moderate fee, have a good track record, and manage their investments effectively. This combination usually results in the best net returns over time.

Your KiwiSaver investment is much like everything else in this world - you get what you pay for.