KiwiSaver: Do you get what you pay for?

The research by Simplicity chief economist Shamubeel Eaqub suggests that paying a higher fee for your KiwiSaver fund does not guarantee a higher after-fee return. In fact, expensive funds often perform only marginally better than cheaper ones, often just breaking even after fees. Paying a lower fee does not necessarily mean a better after-fee return either.

The key is understanding what you are paying for. While some active fund managers undoubtedly have skill and have performed well on a gross basis before fees, once fees are taken into account, investors are no better off. Eaqub compared KiwiSaver funds to other funds of the same type rather than against an index, and found that, on average, the outcomes for investors were the same, whether the fund was an active manager charging more than 1% a year or a passive lower-fee provider charging 25 basis points.

Over a 40-year working life, a fund charging 1.05% a year collects about $53,000 more than one charging 0.25%, but the return promised by that fee is uncertain. Fees are one of the few variables that KiwiSaver investors can control, but it's hard to say that higher fees have consistently translated into higher returns. Passive strategies have benefited from market conditions that have generally favored broad market exposure, while active managers have had opportunities to add value in less forgiving market conditions.

The research shows that the relationship between fees and returns is tenuous, and while higher-fee managers have occasionally outperformed, outcomes vary considerably between managers and periods. The best answer for investors may be to have a good asset allocation, which could mean going 100% US equities over a 10-year period, though that may not be the best risk decision.