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Watch those fees
 
Q.        I am 63 years of age and I have been a regular contributor to KiwiSaver since Day One through my work at that time. I became self-employed in 2012 and am paying in $100 per fortnight. My current balance is $47,810 and it is my intention to contribute as long as I am working, hopefully until I am about 70. I have just let the scheme meander along without taking too much notice but prompted by your column looked at the details and have a question on fees.  Going back to when I started regular fortnightly contributions (May 2013) I find monthly member and administration fees average $24.00 a month - this on contributions of $200......10% of contributions. It seems awfully high? Is this normal?
 
A.         High fees can erode the balance of any investment so you have done well to look at what you are paying. Fortunately, KiwiSaver investors have legal protection in respect of the fees that they pay to have their investments managed. According to the KiwiSaver Act 2006 fees should not be unreasonable and should reflect the services provided. The definition of fees includes all costs to be deducted either directly or indirectly from the member's KiwiSaver account.   Scheme fees must be disclosed in investment statements and all fees will be assessed in line with the legislation when a provider applies to register a scheme.  The Financial Markets Authority (FMA) must be notified of all fee increases. 
 
You will not be charged based on your contributions. If you are paying $24 per month or $288 per year, this is just 0.6%pa on $47,810 and would put your fund at the cheap end of the spectrum.  There could well be other costs but without knowing which fund you are in I cannot speculate further. However, you can find out what you are paying and where your fund ranks by going to the Sorted Fundfinder website (more on this later).
 
While you may think it would be in the interests of fund managers to charge as much as they can, fees do eat into returns. Poor returns will drive investors away and that is not what any fund manager wants. Fund managers who are able to keep their costs and fees low will deliver a better return to investors, attracting more support and increasing their income. 

So what fees are we talking about? Most KiwiSaver schemes will charge a fixed monthly or annual membership administration fee from $0 to $60 per year. This fee is negligible for someone in your situation with a large balance, but a high administration fee can eat into the value if there is just $1000 sitting in the account. This is often the case with children and non-contributing members. Readers can probably work out that $60 per year is 6% of $1000 and you could see the balance diminishing each year. Anyone in that situation should consider changing to a fund with a lower administration fee.
 
The rest of the fees are worked out as a percentage of the account balance and may include a management fee, a trustee fee, performance-based fees and other costs.  To find out where your fund sits in the galaxy of funds, go to Sorted’s Fundfinder website which I mentioned before. Simply choose the ‘Compare Funds’ option and Sorted will display the fees of all 201 KiwiSaver funds on which it currently provides data. 
 
You will see that annual fees start at 0.6%pa with the average at 1.59%pa. Over 2%pa and you are probably looking at actively managed, higher risk funds. You can click on the ‘fees breakdown’ tab to find how the fees are made up. If performance fees are mentioned, these are only charged when the fund outperforms a certain target or benchmark. 
 
Alongside fees you can also see the returns each fund has achieved. These returns are after all fees (except the annual membership fees) and tax at 28% PIR rate.  There should be some correlation between returns and fees. Anyone paying higher than average fees should expect above-average returns.
 
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz