A new analysis has debunked the assumption that low fees inevitably equate with better outcomes for investors, at least the investors in the New Zealand KiwiSaver market. Australian investors can readily be substituted.
The study, released by Australian research house SuperRatings last week, found there was “often an inverse relationship between fees and investment outcomes achieved by members”.
The research, which modelled the experience of KiwiSaver members in 16 schemes based on actual five-year returns and costs, found the two cheapest conservative fund products surveyed were well down the pack (11th and 15th respectively) in terms of net after-tax and fees performance.
However, the two schemes offering the best net performance were both at the high end of the fee scale. According to the research, a member in the high-fee fund would’ve been more than 60 per cent better-off after fees and tax compared to an investor in the cheapest scheme over the five-year period.
Nonetheless, the third least-expensive scheme in the SuperRatings study proved it was possible to be both cheap and deliver good member outcomes after also ranking third in the after-fees-and-tax performance table.
The findings add some empirical data to the researcher’s more generic critique of the KiwiSaver fee debate in its review of the sector last year.
Adam Gee, SuperRatings CEO, said while the published data focused on conservative funds, the researcher had also performed the exercise on balanced and growth funds in its KiwiSaver database producing even more convincing results.
“For example, the after-fees and tax performance of the most-expensive growth fund was more than double that of the cheapest alternative,” Gee said.
SuperRatings produced the research by crunching net returns of a hypothetical KiwiSaver member with an original lump sum of $50,000 (and contributions based on a $50,000 annual salary) over the five-year period.
Gee said 86 per cent of KiwiSaver conservative member returns were attributable to investment earnings with fees playing the remaining minor role in net performance.
Australian superannuation fund members were paying more than four-times their KiwiSaver counterparts, he said, with respective annual median fees of $250 and $60.
In a release, SuperRatings, a division of Lonsec, says the after fee and tax metric provides more useful insights than gross cost and performance measurements as “this is the amount that has accrued in the member’s account”.
Gee said in the statement that the researcher was “highly concerned with the continual focus on fees by many participants within the KiwiSaver market”.
“As is evident from our modeling, whilst fee savings will deliver some benefit to members, the associated reduction in potential investment earnings is often four to five times the level of fees saved,” Gee said.
“All participants within the KiwiSaver market, including regulators, providers and advisers should ensure that the key measure of the industry’s success should be the net after fee and tax outcome, rather than a race to the bottom on fees, which will benefit very few over the longer-term.”
The SuperRatings research also found KiwiSaver scheme member engagement tools had improved since its 2015 research “albeit there continues to be further room for tailored, online education and servicing”.
In its third review of the KiwiSaver market, SuperRatings ranked 25 schemes with seven earning the top ‘Platinum’ accolade and six rated as Gold-worthy.
The researcher, which has operated a similar review of Australian superannuation schemes for almost two decades, SuperRatings, providers across a range of factors – including investment process, admin and member services.
– David Chaplin, Investment News NZ