Navigating KiwiSaver Episode 4: KiwiSaver Fees

Jess and Stuart are back for episode 4 of our Navigating KiwiSaver series. Last week they discussed contributions, this week Stuart explains KiwiSaver fees, he also touches on active and passive investments.

The fee is calculated as a percentage of the net asset value of each fund, and is already deducted from your investment, so returns will be reduced.

Actively managed funds are where investment managers make active decisions on what investments to buy or sell in your KiwiSaver. On the other hand, passive investments copy what the market is doing by tracking and buying the index.

This podcast has been prepared by the FMA. The advice is of a general nature, and is not intended to be financial advice and FMA does not accept responsibility for any loss that any a person may suffer from following it. The FMA recommends that our audience seek their own financial advice in respect of investing in KiwiSaver. Anyone considering investing in KiwiSaver or making changes to their investment in KiwiSaver should seek advice from a financial adviser.

Transcript

Jess

Kia Ora, welcome. My name is Jess. I'm in the External Communications team here at the FMA. And today I am joined by Stuart Johnson again and we are going to talk to you a little bit about KiwiSaver. So last time we kind of did a high level of KiwiSaver, now I kind of want to get more into the specifics.

Stuart

That sounds good. Jess, what would you like to know?

Jess

So, I hear there's some there's some fees on my KiwiSaver. Is that true?

Stuart

There are fees. Yes.

Jess

What are they? What are how much are these fees?

Stuart

OK, you can't remember paying the fee, do you? No.

Jess

Is that a bad thing?

Stuart

It's not. It's not, and it's because the fees are calculated in a in a very specific way, and it's because the money is actually taken out of your KiwiSaver without you knowing. Well, without you having to do anything, so you don't actually have to pay the fee, that is done automatically by the provider. But let's just talk a little bit about how the fee is charged. Jess, do you know how much you've got in your KiwiSaver? Just approximately.

Jess

Roughly 30.

Speaker

Roughly 30. Excellent. That's really good for somebody of your age. You should be pleased with that feel. So let's pretend you've got 40. We've made you younger and richer as we go in these podcasts its great. Lets keep the math simple. 

Jess

I failed math, so do keep it simple please.

Stuart

You've got about 40,000. OK?  The fees are calculated as a percentage of the money that you have in KiwiSaver. So it's quite a small percentage and you pay that every year. Now the fee changes from one provider to another and we'll talk about that in a in a minute. But just imagine that the fee that you are paying is half of 1%. Sometimes you might hear the term 50 points. That means one 100th of a percentage. But let's just say half of 1% because it's a bit easier to understand. So half of 1% of $40,000 is $200. So based on your 40,000 in KiwiSaver, you are paying $200 a year in fees and as your KiwiSaver grows because it's a percentage, the amount that you pay in fees will grow. But that's kind of OK because it means that people who are just starting out who don't have very much, pay less and people who have got lots of money in KiwiSaver pay more. So does that make sense?

Jess

It does a little bit.

Stuart

A little bit. It's important that people focus on the fees that they are paying.

Jess

Yeah.

Stuart

But it's important that they don't just focus on the fees, and this is really the most important part of the consideration around fees and the return. Now we haven't really talked about return. But you've invested this money into KiwiSaver and remember the fund manager that person is investing your money into different stocks and different bonds. Maybe a bit of commercial real estate, all trying to drive a return. Now that return might be 5% a year. So to know if you're getting good value for money, you should be looking at the return minus the fees you've paid. And we would think of that as your total return. So if the fund manager has increased your KiwiSaver by 5%, but you've paid half a percent in fees, you've got 4.5% more money than you had before. Now there's a lot of numbers in there, and it's a little bit complicated for sure.

Each year your KiwiSaver provider sends you an annual statement and that annual statement will talk about where your money is invested, the return that you have received over the last year, the fees that you have paid and it will have a lot of very useful information. It tends to come around the middle of the year, and actually the FMA has a little campaign to encourage people to focus on their KiwiSaver annual statement. So when you see this in the mail. It's a really good idea to sit down for an hour or an hour or two, read the statement, have a look at how the fund is performing and make sure that you are getting good value from your KiwiSaver provider.

Jess

And so, coming back to the fees a little bit, what are what are these fees actually paying for?

Stuart

That's a good question. So, the provider of your KiwiSaver, they have to run a business. So they have a marketing department and finance department and they have to send communications like the KiwiSaver statement. And that that costs money, OK. And they need to charge you a fee for the services that they provide. The other really important thing is the fund manager, and that's actually quite complicated. Investing your money, to drive a return, or maybe in the case of a conservative fund, to really balance the return against the risk or the volatility that's quite complicated. And so to set up an investment team and to undertake that, that's expensive. And so that's part of what your fee is paying for. It's paying for the sort of running of the business and also for the investment management.

Jess

So Stuart i've heard the terms active and passive in regards to KiwiSaver, but I have no idea what that means. Please tell me.

Stuart

Certainly. Certainly, I can. Active and passive speak to the investment management process or how your money is invested. An active manager is where the money is given to a person or a team of people, and they make active investments trying to drive you a greater return. A passive investment is where the money is basically put into a stock market. Or maybe it's easier to think of it as put across the stock market. So there's about 150 firms on the NZX the New Zealand stock market. So imagine if I took your money and I bought an equal amount of all of those different companies. The returns that you received would basically be just the same as the New Zealand stock market returns, so I wouldn't be making any very clever decisions. I would just be doing it across the market and that's basically what a passive investment is. It's a little bit, more mathematical than that, because the amount of money you put into each firm is dependent on the size of the market cap. But please don't worry about that. Basically, it's the difference between just putting the money onto a stock market or a different index. That would be a passive investment or an active investment where we ask a fund manager or an investment manager to make active choices for us. These terms are used a lot and it's good that you've identified them, but do you remember we talked about balanced, growth and conservative funds when you're thinking about where your KiwiSaver should go? I would look at those terms first because they're more important than worrying about whether you're in an active or a passive investment.

Jess

OK, so I feel like we we've covered a lot today. My mind is spinning with all the information. So can you give me a quick summary of the key takeaways people can take out of this this podcast?

Stuart

Absolutely, Jess. So the key thing that I would ask people to focus on would be their total investment return. And remember, we talked about their fund manager is investing the money to try and drive them a return. I want them to focus on that return minus the fees that they've paid to understand their total return. We think of total return as the amount that their money is growing by each year. So have a look at your contributions, make sure you're in a fund that's suitable, and make sure that you've got good total returns, so that's returns minus fees. Remember we talked about the KiwiSaver annual statement that's going to arrive around the middle of the year. That's a fantastic time to sit down, look at your KiwiSaver maybe checking on your overall financial health.

Jess

Yes.

Stuart

When you're looking at that statement again, we want to look at those key things. What are my contributions? Am I invested in the right fund? What are the total returns that I'm receiving and do they seem to be suitable?

Jess

Awesome. Thank you so much. I'm gonna go away and look at my contributions now after this. Thank you so much for listening. If you want more information about your KiwiSaver, head over to our website, www.fma.govt.nz. We will see you next time.