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Choose funds with low fees to preserve 'kickstart'

 

Q.        Should parents sign their kids up to KiwiSaver or will the fees just erode the one off payment of $1000?

 

A.                 If you enrol your child at birth for the $1000 Government ‘kickstart’ and for 18 years make no further contributions, investment returns should more than cover the fees over the period.  However, it would pay to choose a fund with low fees.

 

The latest quarterly KiwiSaver report from Morningstar -www.morningstar.co.nz - shows the fees for each KiwiSaver fund.  The term used is TER or Total Expense Ratio.  This includes all internal fees within the fund, including management fees and trading costs.  These are all deducted internally before the unit price is calculated. 

 

While it is useful to know what the TER is, as a percentage it is not a significant cost to KiwiSaver investors.  Some funds have a TER as low as 0.36% per annum. 

 

However, in addition to those internal costs, each KiwiSaver member is charged an administration fee, which is usually deducted monthly from their account.  This is the more expensive part of the scheme, for those with a $1000 balance, as it is a fixed dollar amount whether your balance is $1000 or $100,000.

 

Most KiwiSaver funds charge an administration fee of $3 per month (or $36 per year) but they do vary with the lowest at $24 per year and the highest at $50 per year. 

 

$50 is 5% of $1000 so you would be wise to avoid funds with such high administration fees and aim for a cheaper fund instead.  To find out more about these fees go to the Morningstar report or read the section in your fund’s investment statement under ‘What Are The Charges?’

 

Having chosen a fund with lower administration fees, you then have to decide whether you should choose a more conservative or more aggressive fund.  In theory, the younger you are – and the longer timeframe you have until retirement – the more volatile or aggressive you can be in your investment strategy. 

 

However, if you choose an aggressive fund and it has a few years of negative returns, your child’s $1000 will get eroded quite quickly especially if the administration fees are 5% per year. 

 

According to the Morningstar report, conservative KiwiSaver funds achieved the best returns over the past 4 years with an average of 5.2% per annum.  While aggressive funds overall averaged a disappointing 2.1% per annum, the top performing aggressive fund achieved 7.1% per annum over the past 4 years.  So there has been a big variation in performance at top end – much greater than at the lower end of risk the spectrum.

 

As you can see, over 18 years the sum of $1000 could go down in value, but it could also increase quite substantially.  If you enrol your child at birth and their fund achieves just 3% per annum after fees it will be worth $1700 by the time they turn 18. 

 

Of course if at any time you are not happy with the performance (or fees) of the fund you choose, you can switch to another fund. 

 

 

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.

As published in the Hawkes Bay Today 15 May 2012