We don’t know, of course, how much any KiwiSaver fund will grow. But we do have a good idea of fees charged. And fees matter.
Using data from www.sorted.org.nz
, Canstar has recently published its first KiwiSaver comparison. It includes management expense ratios (MERs), which incorporate all fees.
With the KiwiSaver minimum contributions scheduled to change, I’ve decided to keep things simple and assume that you, the government and your employer – if you have one – contribute a total of $250 a month.
Let’s look first at default or conservative funds – both of which invest about a fifth to a quarter in shares and/or property and the rest in lower-risk assets such as bonds and bank deposits.
We’ll say each fund gets an average return of 4 per cent after tax over the years. According to Canstar, fees on these funds range from
0.4 to 1.2 per cent, leaving us with after-fee returns of 2.8 to 3.6 per cent. They may not look that different, but read on.
If you are 55, with 10 years to go in KiwiSaver, your $250 per month will grow to about $34,600 in the highest-fee fund, or $36,000 in the lowest-fee fund. The difference is 4 per cent - not huge, but the extra $1,400 could buy some nice treats.
What if you are 18, with 47 years to go? With the highest fee, your fund will grow to $289,500; with the lowest fee, $362,900. That’s 25 per cent bigger. Decades of somewhat higher returns make a huge difference.
Now let’s look at growth funds – with shares and/or property making up 70 to 80 per cent of the investments. This time, we’ll assume annual average returns of 6 per cent after tax. Fees on these funds are a bit higher, as they cost more to run. They range from 0.48 to 1.35 per cent. So after fees, returns will be 4.65 to 5.52 per cent.
At 55, the account will grow to $38,100 with high fees, or $39,800 with low fees. The difference is about 4.5 per cent.
At 18, it will grow to $493,900 with high fees, or $643,400 with low fees. The difference is more than 30 per cent. Wow.
But hang on a minute. Perhaps high-fee funds bring higher returns.
History suggests that some will, but some will do way worse than average. And I don’t know a good way to pick the good from the bad.
It’s best, I think, to go with a low-fee fund – as long as everything else about it, such as communications and integrity, seems good.
A couple more points:
• It makes no difference to our findings if your KiwiSaver
contribution is higher or lower than $250 a month. The percentage differences in the fund totals will be the same.
• You may have noticed that the conservative and growth totals aren’t
all that different over ten years. Because you drip-feed money in, quite a large proportion of it will be in the account for only a few years. There’s not enough time for compounding to have much effect, so you don’t get much reward for taking more risk.
On the other hand, if you are 18, the growth fund totals are approaching twice as much as the conservative fund totals.
Keep in mind, though, that if you plan to withdraw KiwiSaver money to buy a first home, it’s a good idea to invest in a more conservative fund for about ten years before you plan to make the withdrawal.