This article was published on 24 November 2012. Some information may be out of date.

Q&As

  • Lessons from a bad managed fund investment
  • An older reader’s tips on money and life
  • Do parents commit their children to KiwiSaver if they sign them up?
  • Meaningful Christmas giving

QYou often recommend managed funds, but I believe they’re a rip off.

My friend Trish joined a superannuation plan with Guardian in 1998, now run by Asteron. She contributed $300 a month at the start, increasing with inflation. After fourteen years, she’s put in about $60,000 and has $58,000 to show for it!

This is less to do with the world economy, which is the excuse the agent gives, and a lot to do with the fees, which are outrageous. (Trish wasn’t aware of them when she joined). Of the $3600 she paid in year one, 62.51 per cent went in fees. Of the $5400 she paid in the next 18 months, 65.34 per cent went in fees. They take 4.39 per cent of every annual contribution after that (this changed in 2006, but they didn’t say what the change was).

They also take 3 per cent of every monthly contribution. And they take a monthly admin charge of $4.58. And finally, they take 0.9 per cent of the total value of her fund each year as an “investment management fee” (on $58,000, this fee is $522). Incredibly, they charge these fees even when they lose you money.

Not surprisingly she’d like to withdraw her money, but they won’t let her until the plan matures in 12 years because 14 years ago she ticked a tiny box saying “Locked In”. Can they really hold her to this? After all, it’s her money! We believe they’re refusing to let her out so they can keep gouging fees out of her.

In summary: they can charge massive fees, do a terrible job investing her money and there’s not a thing she can do about it.

Two questions Mary. Legally, can she get her money out? And do you still think managed funds are a good idea?

AI don’t think I’ve ever recommended managed funds without qualifying that.

The two big advantages of managed funds are: they give much wider diversification than most people can otherwise achieve; and it’s a lot less hassle investing in a fund than in several direct investments, keeping track of dividends, interest payments, rollovers and so on.

The big disadvantage — which I hope I always mention — is fees. They vary a lot, and the level of fees makes a big difference. I recommend only funds that charge low fees.

As you note, your friend has been walloped by huge fees, especially in the first few years when big sums were going to the agent who signed her up. Such practices were quite common in the 1990s, but I don’t think they ever happen now.

With your permission, Asteron has discussed the details of Trish’s investment with me.

“This policy was one of a group of products inherited by Asteron Life which included a heavily fee laden structure from Guardian Assurance,” says an Asteron spokesman. “The fee structure is far higher than what would be saleable today. This would have contributed to the drag on growth”.

He adds, “It is not unusual for superannuation funds of this type to take up to 10 years to break even.” That’s shocking. Thank goodness it no longer happens.

The spokesman also points out that market returns on New Zealand shares, in which Trish invested, haven’t been great over the period. “The combined result of poor market returns and a high fee structure is a low return on investment and an unhappy customer, and we do empathise with the situation.”

He adds that Trish’s fund has performed better just recently, and the value does now exceed her contributions, although only by a little.

What can she do about the situation? Stop contributing. If she did that, “she would reduce her ongoing charges to only the $4.58 per month administration fee and the 0.90 per cent investment management fee,” says the spokesman. That’s not great, but not quite so bad.

Unfortunately, though, she can’t get her money out now unless the trustee “is satisfied there are sufficient grounds for withdrawal including hardship, redundancy, emigration, disability, unemployment or triviality.” By “triviality”, they mean the value is less then $2500.

The spokesman adds, “the purpose of superannuation funds is for the investor to remain committed to saving for their retirement, hence the locked in box.” And on Trish’s application form “she specifically nominated and wrote down a retirement age of 60, despite there being the option to lock into only age 55, and there being unlocked product options available.”

There are a few lessons here, for Trish and everyone else:

  • Know what you sign up to.
  • Pay particular attention to fees.
  • Opt for as much flexibility as possible, particularly with longer-term commitments.

Meantime, with any luck market performance will improve and Trish’s savings will grow before withdrawal time. She might find the main message in the next letter helpful, too.

QSeveral of the letters in recent columns have bemoaned the uncertainty of home ownership and high costs of the market in Auckland. If it is too costly (hot) for you, get out of the city (kitchen) and find life and work in a provincial town or city.

Yes one will most likely experience a drop in the dollar stakes, but you will certainly gain quality of life. I did. Or as many have said in the past, “It is not what is dealt to you in the game of life but how you deal with it!”

I have had to start over from behind zero on several occasions (remember 1987 when lots of us were fleeced?). So it is a case of making small steps financially and not forgetting the really important stuff like “enjoying what one has and does every day”, which makes living so rewarding.

As I say to younger folk, “Take the chance. Life is for learning and most times you will be surprised at the fantastic outcome — even the “disasters” when you look back several years hence. And don’t fret the permanence of job or home ownership.

AThanks for putting things in perspective.

QMy wife and I have signed up our infant daughter into KiwiSaver. It just makes sense while the $1000 kick-start is still around.

But looking into the details the other day, I realised that I have removed her ability to “opt-out”. Is this correct?

As far as I can work out, the only way out for her, if she chooses, would be to take contributions holidays every five years until she retires — except for her first year of work, where she will have to contribute.

(By the way, if it came to it, I would be encouraging her to stay in and contribute to KiwiSaver.)

AYou’re almost right, except for the bit about your daughter’s first year of work.

When employees first join KiwiSaver, they have to contribute for a year before they’re allowed to take contributions holidays, unless they suffer from financial hardship. But by the time your daughter starts work she will have been in for many years, so that won’t apply to her. She can take a contributions holiday right away if she wants to.

Beyond that, though, yes, you have committed her to contributing to KiwiSaver while she’s employed or filling out a simple form every five years so she can take holidays. Horrors!

I wouldn’t lose sleep over it if I were you. Chances are that she’ll want to participate anyway, especially given her parents’ encouragement.

A recently released report shows that about 75 per cent of New Zealanders in their early twenties are in KiwiSaver, and by the time your little one gets to that age it will be more. So it will definitely be the “in” thing to do — partly because in most cases it’s the best place to save for a first home.

Still, if your daughter is a non-conformist and she really wants out — to a greater extent than taking contributions holidays — I imagine she could get out. It seems wrong that a parent can legally bind their child. It will be interesting to see if this is tested in court at some stage.

Of course it would all become academic if KiwiSaver becomes compulsory. I don’t want that to happen, but it might.

CHRISTMAS GIVING

Many charities offer Christmas gift programmes. You buy items for people in need that are given on behalf of your family or friends. For example, you might donate money for school equipment for children in developing countries. You receive an acknowledgement to give to your relative or friend to show them what they have “donated” to the children.

It makes a great Christmas gift — more meaningful than buying stuff for one another that is often not wanted.

The following charities take part in these programmes. I’ve asked each one to describe or “sell” their programme in 20 words or less:

  • Caritas Aotearoa New Zealand: 0800 22 10 22 or www.caritasgifts.org.nz. Caritas Gifts of hope, life, peace and learning help our life-changing work around the world and in Aotearoa New Zealand.
  • ChildFund New Zealand: 0800 223 111 or www.childfund.org.nz. Camels are the perfect gift for families in need this Christmas — donate a real one and change a family’s life.
  • Christian World Service: 0800 747 372 or www.gift.org.nz. Change overseas lives for the better. Choose from chickens, goats, water, gardens and more.It’s simple, fun and it works.
  • Leprosy Mission New Zealand: 0800 862 873 or www.reallygoodgifts.org.nz. Share the joy of changing lives the Kiwi way, by giving your loved ones Really Good Gifts for Christmas
  • MEND NZ: 027 329 8368 or 09 407 8395 or www.mend.org.nz/giving. Give a gift that can really uplift a disabled person in a developing country to become mobile, employable and independent!
  • Oxfam: 0800 600 700 or www.oxfamunwrapped.org.nz. Pass the parcel with Oxfam Unwrapped this Christmas, and let the gift land where the need is greatest.
  • Salvation Army: 09 639 1120 or www.salvationarmy.org.nz/givehope. These gifts will help provide opportunities, better living conditions, education and freedom for people overseas.
  • Save the Children New Zealand: 0800 167 168 or http://shop.savethechildren.org.nz. You can help families earn a living, or ensure children receive education and healthcare, or food and water in emergencies.
  • The Fred Hollows Foundation: 0800 227 229 or https://www.hollows.org.nz/gift-of-sight. For $25, you can give a beautiful Gift of Sight card and help restore sight to someone in the Pacific.
  • UNICEF: 0800 537 739 or www.inspiredgifts.org.nz. From vaccines to storybooks or water kits — whatever your Inspired gift this Christmas, it’s guaranteed to change a child’s life.
  • World Vision: 0800 24 5000 or www.worldvision.org.nz/smiles

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.