KiwiSaver: Returns versus fees – what’s more important?

The KiwiSaver fees you pay and the returns you could make are hot topics these days.

Some experts argue you should judge how your account’s going by your returns, some say it’s all about keeping your fees low, and some are in the ‘returns after fees’ camp.

So, how do you work out what to focus on?

What are ‘returns’ and ‘performance’?

When you invest, you’re aiming to make ‘returns’, or make more money off the amount you’ve invested. This is the purpose of investing – you wouldn’t do it otherwise.

A pattern of returns, good or bad, is ‘performance’. You can work out performance over any time; a day, three months, a year, seven years and more.

You usually see returns in percentages. For example, a growth fund might have returned 8% a year, annually and on average, for 10 years, after fees and tax.

How do you know if performance is good or bad?

There are different ways to compare KiwiSaver returns.

The best performance reference point for most KiwiSaver funds is their market index. A market index is meant to have a similar make-up to the fund you’ve chosen, which is important because it means the index has similar risk to what you are taking with your fund. If your fund does better than its index, then it’s outperforming. If it does worse, it’s underperforming.

Look at long periods, five years or more, rather than short periods. Providers might advertise how good their returns have been over a quarter, or over a year, but it’s long-term returns that really count.

A pattern of good performance gives you some confidence, but it may not continue. However, a long period of underperformance may be a clear sign you should look for a provider that can do better.

To help with that, you can look at online tools to compare your fund’s performance against other, similar funds. Sorted’s Smart Investor tool, the FMA’s KiwiSaver tracker, and reports like Morningstar’s, can provide a good guide. (Note, you won’t yet see JUNO and some other providers because they’re too new).

What affects how much money you can make?

Not taking on enough risk might hold you back from making enough returns to achieve your goals.

When you take on more risk, for example, picking a riskier growth fund, you have the potential to earn higher returns, and enjoy better performance. If you’ve invested in a lower-risk, conservative fund, your returns are unlikely to be as good.

But if you’re in a riskier fund, you must also be prepared to see your balance drop from time to time.

Expenses also hold you back – that’s fees and tax.

You always have to pay tax on your KiwiSaver returns, so make sure you’re on the right tax rate, or ‘PIR’. You could be overpaying tax and you can’t get that back.

Your KiwiSaver provider charges fees to cover the costs of managing your money.

Over a long time, fees can really add up. And if you’ve got a small balance or aren’t earning much, fees can eat into the small amount you have saved.

You might be happy with the fees you’re being charged, if you’re getting good value. You might be enjoying good performance, and happy with other things, like customer support, for example.

Or your provider might not be performing well, relative to their market index and other similar funds, so you’re not getting much in return for your high fees.

It’s important to work out how much you’re paying in fees. Most providers show this in percentages, so it can be hard to work out. And there’s usually more than one type of fee. You’ll find the dollar amount on your annual statement, or call your provider, to find out how much in total you’re paying in fees.

So, what’s more important? What should I focus on?

You need returns to hit your investing goals. Even if you’re not being charged fees, no returns means you have nothing to show for your savings.

But you can’t think of returns and fees separately. Returns may vary, but fees always happen. It’s very hard for returns to be consistently good over long periods. But study after study shows that even the most successful investment strategies in the world do the same, or worse, than their market index, once you take out the impact of high fees.

So, our answer is, any investor needs to consider both fees and returns when they’re looking at their investments. Take a look at both of them regularly (at least when your annual statement arrives), compare, and make sure you’re happy. If you’re not, take that hard-earned money somewhere else.

And try not to focus on either of them too often – your KiwiSaver investment isn’t something you should be losing sleep over!

Published September 2019

Story by Paul Gregory, Pie Funds

Paul Gregory is the Head of Investments at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. It does not constitute financial advice. We recommend you speak with a financial adviser.