Is It Time To Jump Ship?

QUESTION:    My wife and I belong to two different KiwiSaver schemes.  Mine is an active growth fund with quite high fees while hers is a passive growth fund with lower fees.  We are self employed and contribute $100 each month.  My scheme has done much better than hers – it’s worth $11,300 compared to hers at $9,750.  Should she change to a better performing fund?

Answer:  There may be several reasons to change schemes, and performance is only one of them.  There are other important issues such as investing philosophy, fees, and communication. 

First, the facts.  If you have been a member since inception, you will have contributed $5100 yourself and received $5171 in Government contributions – a total of $10,271. 

Comparing that figure with the current value, your scheme has gained 10% while your wife’s has lost 5%.  As you are both in growth funds, this variation is well within the range of expectations.  Growth funds have a larger percentage in shares which can fall by 20% or more.  Over the past 4 years we have experienced a global financial crisis which is still making its presence felt particularly in the US and Europe.  This has severely dented confidence in financial markets, and many funds have reported negative returns.  Four years is not a particularly long time period to compare performance between growth funds. 

Fees are often used as a tool of comparison between funds.  An active manager may charge higher fees (including a performance fee) but that fee might be justified by higher returns.  So basing your decision on fees alone is not enough.

Communication and access to information are also important.  Some investors like to get ‘under the bonnet’ of their scheme and know how and why the manager makes investment choices.  Other investors are not that interested in where their money is invested, but they still like to be able to check their current balance quickly and easily.  You don’t want a year to go by before you discover that you didn’t get all the tax credits that you were entitled to.  If you haven’t been checking your balance online at least every 6 months I suggest you begin doing so. 

There are dozens of providers and many funds to choose from.  The providers range from large banks to boutique fund managers.  The fund spectrum goes from low risk cash to high risk shares, from passive to active, hedged and unhedged.  There are also ethical or socially responsible funds available, as we discussed last month. 

Your question cannot be answered completely within in the scope of this column.  You may like to discuss the issues further. Only an Authorised Financial Adviser (AFA) can give advice on KiwiSaver. You can search for an AFA on the website of the Financial Markets Authority (FMA) at www.fma.govt.nz.  It also gives guidelines on choosing and working with an Adviser.  There are 23 AFAs in Hastings and 28 in Napier.  Not all will specialise in KiwiSaver but it is worth a phone call to find out. 

Published in the Hawkes Bay Today 8 November 2011 

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.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

KiwiSaver Fees Not A Big Issue

QUESTION:  I am worried about the impact of fees on my KiwiSaver savings.  How do I find out what they are and the impact they are having on my scheme?

ANSWER:       KiwiSaver fees have been in the news lately.  You might have heard Green Party Co-Leader Russel Norman saying that people could save up to 40% or $64,000 in fees over the lifetime of their savings by investing in a lower cost fund.  Is this a pre-election attention-grabber?  Let’s take a closer look.

KiwiSaver fees are scrutinised by the regulators and are required to be ‘not unreasonable’.  Just the other day NZ Herald business writer (and Hawkes Bay local) David Chaplin analysed all fees and expenses as reported by providers and came up with the rather modest figure of 1.4% of funds under management as an industry average.   Contact me if you would like to see his figures.

To find out what fees are deducted from your fund, go to the investment statement and find the page entitled “What are the charges?”  Fees are taken out before the unit price is calculated.  You may also be paying an admin fee of around $3 per month and you will see this on your statement. 

If you want to find out how your fund compares with other funds, there is a great calculator on the ‘Sorted’ website.  You will pay lower fees if you are in a passive fund (which tracks an index) or a cash type fund.  Active funds - which rely on the skills of the manager to aim for higher returns – will generally charge higher fees.  

According to the ‘Sorted’ calculator, a person aged 40 earning $60,000 per year will pay between $3,460 and $16,900 in fees over 25 years.  

So where did Russel Norman get $64,000 from?  To achieve a saving of 40% or $64,000 (in today’s dollars) we’re talking total fees of $160,000 over the lifetime of your fund.  I struggled to get the Sorted calculator to spit out these numbers.  You would need to be a 20 year old earning $50,000 per annum contributing 8% of your salary into an active boutique fund for 45 years to pay fees of this magnitude.  You have to admit, a highly unlikely scenario. 

Are fees that important?  Compared with the considerable financial incentives to join KiwiSaver, the fees are inconsequential.  The attraction of KiwiSaver comes from the Government and employer top ups – a wage earner on $60,000 and contributing 2% is getting $1.43 for every dollar they contribute themselves. 

Performance is also more important than fees.  If your fund is doing better than most, you probably won’t complain about paying fees.  On the other hand, if you are in a fund with the lowest fees you won’t get any satisfaction if your fund is coming last in the performance race.

You are free to change managers, so if you are not satisfied with your fund you can switch.  That in itself should keep fund managers on their toes, and motivated to deliver value for money to investors.

Published in the Hawkes Bay Today 15 November 2011 

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.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Government has provided strong KiwiSaver incentives

QUESTION:    I haven’t joined KiwiSaver because I don’t trust the government.  Why should I join if they can keep changing the rules?

Answer:  KiwiSaver is governed by the KiwiSaver Act 2006.  Changes are not made lightly.  Some changes might improve the scheme while others might make it less attractive.  If you join and then decide it’s not for you, you can take a contributions holiday any time after twelve months (or earlier if you’re experiencing financial hardship).  The self-employed have even more flexibility and can stop and start as they wish.

The government has provided strong cash incentives for people to join and membership has exceeded their expectations.  Those savers who have been in KiwiSaver from the start have received up to $5168 from the government, if they have been saving at least $87 a month themselves.  That money from the government – the ‘kickstart’ and annual tax credits of up to $1042 - has gone into their KiwiSaver accounts.   In most cases, it will stay there increasing in value until they can access it at age 65 (or after 5 years if they joined after age 60).  Even though the tax credit has been reduced to $521 per year, KiwiSaver is still a generous scheme. 

There are now around 1.8 million New Zealanders signed up to KiwiSaver.  The largest group of KiwiSaver members is children (age 0 – 17) with nearly 300,000 (as at 31/3/2011 - according to the official KiwiSaver website).  So a large number of New Zealand parents and grandparents have made the decision on behalf of their children, to get the $1000 kickstart.  The second largest group is the 55+ age group, whose retirement is fast approaching. 

The ‘sorted’ website is a great place to start if you want to do some sums on KiwiSaver.  It has two very useful calculators:  one shows how much you will save if you join KiwiSaver and another one allows you to compare the fees of the various providers. 

Those who say that they don’t trust the government may think that their savings will somehow be taken away from them.  This will not happen.  The government does not have access to KiwiSaver accounts.  The government can put money in (via Inland Revenue) but they cannot take money out.  KiwiSaver is like a bank account in your own name, looked after by a fund manager and a trustee.  You choose the type of fund, from low risk to high.  KiwiSaver is highly regulated.  You will get regular statements from your fund manager.  You can sign up for regular informative email updates.  You can view your account balance online with a user name and password. 

If you are still not convinced, talk to friends who are in KiwiSaver and find out if they are happy with their savings.  They might just provide the motivation you need to sign up.

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.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Published in the 'Hawkes Bay Today' 1 November 2011