‘Dud’ KiwiSaver funds can have big consequences: analysts

AUCKLAND: If you are in a dud KiwiSaver fund, you might not know any different.

But in 20, 30 or 40 years’ time it could be the difference between being able to afford to go on holiday, eat out or even just buy a bottle of wine in retirement.

SuperRatings chief executive Kirby Rappell said knowing a fund was a dud came down to three things.

‘‘Are your returns decent? Are your fees decent and do you get service by your fund manager? There is obviously all the pieces underneath it all but from a consumer perspective what they are seeing each day, those are the three things typically.’’

SuperRatings is an Australian ratings agency which analyses KiwiSaver funds.

Mr Rappell said to do a comparison people should start with a copy of their funds’ annual statements, usually sent out once a year about May, and then compare both the performance and the fees with the median KiwiSaver fund in a comparative category.

SuperRatings and rival Morningstar both run performance tables comparing conservative, balanced and growth funds.

Morningstar releases its data quarterly and SuperRatings has an annual report which also compares the net benefit of funds — what people get in the hand after taking into account the performance, fees and tax.

Governmentbacked website Sorted also has a KiwiSaver fund finder tool which allows users to check out where their funds rank on fees, performance and service.

Sorted personal finance lead Tom Hartmann said fees needed to be reasonable.

‘‘If the fees are not reasonable compared to its peers, it can be considered a dud. Essentially, what you are wanting to do is a bit of a costbenefit analysis — if you see fees are higher than average, ask: are they justified, are they reasonable?’’

However, it was not necessarily about picking the cheapest fund, but rather being aware paying more for something did not necessarily get a higher quality product, Mr Hartmann said.

‘‘It’s very different from say, buying a car.’’

If a provider was charging more, it meant they were not passing the returns on; they were keeping more for themselves.

MyFiduciary principal Chris Douglas said the general rule was if someone was paying more than 1% of their account balance in fees, then the fund needed to give a really good return.

‘‘And if you are paying more than 1.5% then you have got to make sure you are in a really, really good fund. So my view is anything over 1.5% is actually a dud because it is a really expensive fee to be paying and anything over 1% is actually expensive — that is for a growth fund.

‘‘If it’s a cash or conservative fund — if you are paying anything more than 0.5% then I think you are in a bit of a dud, and there is a lot out there.

‘‘There is a lot of conservative funds that are charging 1% or 0.8% or 0.9% and it is just a very high fee to be paying for something that is basically yielding you about 1% at the moment.’’

However, there were some providers out there that seemed worth paying more for.

Mr Rappell noted Milford Asset Management had higher fees, but had also had consistently higher returns, meaning it topped or come near the top of the tables in Superratings’ net benefit analysis.

‘‘Their fees aren’t cheap but their returns are really good.

‘‘And then conversely ASB has had some pretty good returns over the years as well but they have got a much simpler, cheaper structure.

‘‘You want to check the earnings and you want to check the fees because it is really both that is going what you get to eat at the end of your journey in KiwiSaver.’’

Mr Hartmann said Sorted did not advocate for the idea of picking funds based on their investment performance, as past performance was not guarantee of future performance.

‘‘We don’t advocate picking the best performer because it could be the worst next year. They can have a good quarter or bad quarter but then they revert to the average.

‘‘It swings so it is not a good way to pick at all, but we can say if a fund has consistently underperformed its peers for a long period of time then it is a dud.

‘‘That is what you want to look out for — it could be a sign of mismanagement or could be a sign of bad luck.’’

He said investment performance should be compared over the longest time possible — at least five years, and 10 years was better still.

‘‘The longer the better, but obviously some are newer funds and you won’t have that luxury.’’

Service was also an important factor.

Mr Rappell said some KiwiSaver members found out their providers’ levels of service were not up to scratch the hard way during this year’s Covid19 market meltdown when they could not get hold of their providers.

‘‘That was a real challenge for some during Covid.’’

Good service meant the provider should have online tools to help people decide which fund they should be in and calculators to work out how much they needed to save for a comfortable retirement, Mr Rappell said.

However, they should also have a contact centre to answer people’s questions, give advice and resolve any problems.

Mr Rappell said apps were increasingly important, too.

Sorted surveyed providers every six months on their services and allocated a percentage rating, but it was more about the quantity of services a provider had than the quality — that was something you might need to ask around about.

Mr Douglas said if people had not heard from their providers in more than a year, that could be a red flag as well.

Wrong fund for you

Sometimes it was not about the fund being a dud as such, but that it was simply the wrong fund for the investor.

Mr Hartmann said that even if a defensive fund was a star performer, it could be dud for someone if they had a long time until retirement and did not need the money to buy a house.

‘‘If it doesn’t match your situation, your circumstances and more specifically your timeframe and your comfort level with the ups and downs that come with certain levels of risk — it might not be a dud in general but it might be a dud for you.’’

Mr Douglas said many of those in default funds — where people are automatically allocated if they do not choose a KiwiSaver fund — were sitting on a dud.

‘‘I think that if you are in a default fund and you have got a long investment horizon and you haven’t done anything since moving into KiwiSaver then your fund is a dud.

‘‘It is highly unlikely that fund will match what your objectives would be for KiwiSaver which is to maximise the return you can over the timeframe you have to invest.’’

People making sure they were in the right fund for their risk profile and investment time horizon was critical, he said.

‘‘I know people will sit there and say, ‘well we learned a lot about people’s risk tolerance with Covid’, and we did, we learned that people are very quick to switch and they do have that ability with KiwiSaver.

‘‘But I still believe there is a lot of people out there that don’t properly make sure that they are in the correct risk profile. And that is going to have the biggest determinant of what their future cash balance is like — how much they have when they reach retirement age.’’

What do you have to lose?

Mr Rappell said SuperRatings’ modelling had shown if someone got 2% less than they could be getting per annum, that would mean they could be up to 30% worse off when they retired.

‘‘If you are stuck in that dud fund for 10 years and only figure out in 10 years’ time and then switch to a good fund you are not going to get that 10 years of low performance back.

‘‘It is already baked in and you are not going to be able to catch it up. The biggest payoff is checking your KiwiSaver provider now, and making sure they are competitive and diarising that every two or three years you are going to check again to make sure it is keeping pace with the market.

‘‘The real challenge is you don’t get a sugar hit right now, but when it comes to retirement that extra $50 or $100 a week over the pension makes a huge difference to people.’’

Mr Hartmann said an average earner who sat in a conservative fund for their whole working life could potentially have $100,000 less in their hand at retirement than if they had been in a growth fund.

‘‘Now that is a huge difference in terms of they way you live in retirement and how you retire and what your retirement situation is.’’ — The New Zealand Herald