SuperRatings, an independent Australian investment research firm that reviews the KiwiSaver market, released a new study on the relationship between fees and investment returns of KiwiSaver Schemes.
Adam Gee, CEO of SuperRatings said “we remain highly concerned with the continual focus on fees by many participants within the KiwiSaver market. As is evident from our modelling, whilst fee savings will deliver some benefit to members, the associated reduction in potential investment earnings is often four to five times the level of fees saved”.
The table below from SuperRatings uses real KiwiSaver Scheme data over the past five years, but hides Scheme names. As you can see, Schemes A and B had the lowest fees, but their after-fee and tax outcome (i.e. net return to investor) were ranked 11th and 15th respectively. Whereas, Scheme D and E had higher fees and their after fee and tax outcome were ranked 1st and 2nd respectively.
Investors in Scheme D paid $2,331 more in fees over the 5 years than investors in Scheme A, but were rewarded with $10,334 more in investment returns. When you subtract the investment gains from the extra fees paid, the investor in Scheme D was $8,003 better off over the period.
This does not mean that higher fee funds are better than lower fee funds, but what it does show is that investors should not focus on fees in isolation because fees are only one component of their total return. As SuperRatings states, “a far better assessment of value for money would be to focus on the investment return achieved by each Scheme, net of any fees and taxes”.
It’s refreshing to see independent research like this conducted on the KiwiSaver market. We agree with this stance and would argue that, in general, an investor’s net investment return (returns after fees and tax) will have the biggest impact on how large their account can grow over their working life. Fees are a part of that picture, but should certainly not be the focus.
At the end of the day, if you’re paying low fees and also achieving low returns that’s not a good outcome. As we previously showed here, the variation in net returns from types of funds (e.g. growth vs. conservative) has been 7x larger than the variation in fees. That’s why it’s best to focus on your after fees and after tax returns.
If you’re curious how your own KiwiSaver fund ranks in terms of fees and performance, try Sorted’s Fund Funder tool found here.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.