How often should you switch KiwiSaver providers?
Assuming you made an informed decision the first time around, you shouldn’t have to.
Sadly the strike rate there is probably the same as getting the right partner first time around. If the divorce rate is any indication, that’s about 50%.
When KiwiSaver was first introduced in 2007, most investors were in the dark. They didn’t understand what KiwiSaver was and how it worked, let alone who would be the best ‘provider’ to choose.
The KiwiSaver vernacular didn’t exactly help. Schemes, providers, contribution rates, fund types and management expense ratios…these terms weren’t particularly helpful for first time investors more familiar with property than share markets.
Almost 20 years on however, KiwiSavers, especially those with significant account balances, are tuning in and exploring the options available to them.
According to Inland Revenue, which sits on all the KiwiSaver data, between 11,000 and 15,000 investors have switched to different fund managers every month since last June. That’s a fair bit of activity.
When KiwiSaver was first introduced, there was a prophesy that when account balances swelled to about the same value as a car, people would start to take a more active interest in who they were invested with, and other important considerations like performance and fees.
With average balances hitting the $30k mark, that’s exactly what we’re seeing and what’s likely behind the transfer activity.
That and competitiveness among the 39 players in the market all vying for those balances as they build up in size. Fund managers make their money off the fees charged on the balances, so they’re highly incentivised to lure people into their camps.
According the Financial Market Authority, fees on KiwiSaver funds now exceed $800 million.
The average fee per dollar invested is around $.70 for every $100 but there is a wide range between $.025 at the lower end and $1.25 per $100, at the higher end.
I’ll put this into context and pick on my own bank, Westpac, which I happened to like. And no, I don’t have my KiwiSaver money with them.
On a fund balance of $30,000, the fees on a growth fund are $165. That’s in contract to say Simplicity’s growth fund which would have a fee load of $87. Note Simplicity just lowered its fees for the seventh time from $0.25 to $0.24 per $100. For the calculations below I have used their old fee load of .25
When that balance snowballs into $130,000, the difference (and this is just a snapshot in the annual fee) is $377 (Simplicity) versus $715 (Westpac.)
Those charging higher fees usually charge into this debate and point out that a better performing fund will reduce the sting of those higher fees, if it outperforms its cheaper competitor.
Well that’s true, there is plenty of research that shows very few fund managers can out-perform over the long-run, over period of 10 years or longer.
And this knowledge becomes more widespread, and investors become more interested in retirement wealth, I expect KiwiSaver transfers will continue to grow.
I won’t minimise the impact of lower fees, and it is most definitely a consideration for me in terms of where I invest my money.
But I would say that there are other considerations worth noting so one shouldn’t get too obsessed with fees alone.
Research house Morningstar evaluates funds based on five key pillars— Process, Performance, People, Parent, and Price—which its analysts believe lead to funds that are more likely to outperform over the long term on a risk-adjusted basis. (Read more here).
Not many investors in KiwiSaver will be bothered to do the research. In my experience, most have been enrolled into schemes they don’t understand through their work, their banks, or on the advice of a friend they think understands investments better than they do.
In many cases, their nest eggs will be just fine. But for some stuck in long-term under-performing funds that are charging above average fees, they could be doing much better.
For those who can be bothered to do the research, Morningstar’s excellence quarterly report on KiwiSaver is a fabulous resource. The latest one for the June quarter can be viewed here.
Comparisons can also be made on the Smart Investor website here, also an excellent but under-utilised tool in NZ.
For the benefit of those who are still stumbling in the dark and perhaps don’t know who their provider is, it is as simple as calling Inland Revenue or logging into their online portal MyIR.
If you’re still motivated, use either of the comparison websites referenced above but ensure you’re comparing apples with apples and oranges with oranges. i.e. make sure that if you’re comparing performance, that you aren’t comparing the performance of your Conservative Fund with a High Growth fund.
Why? Because the asset allocation is totally different. That’s another blog.
Getting advice and or guidance is always an option too. That’s particularly the case, if you feel like realistically you’ll just never get around to it but want some peace of mind about knowing you aren’t languishing with a dud.
