Unless you select a scheme yourself, people joining KiwiSaver are automatically enrolled into one of the six default schemes.
‘Under the government-mandated scheme, new KiwiSaver members are automatically enrolled into one of the six default schemes with conservative settings, which means having a large chunk in cash.
According to research by ANZ and its funds managment subsidiary Onepath ‘People who join KiwiSaver funds by default are missing out on as much as $72,000.00 each over their lifetimes. Conservative funds can seriously disadvantage the saver.’
IRD’s offical monthly statistics state 2,039,362 people were enrolled in KiwiSaver as of November 30, 2012. About 40% of them have remained in default funds. If they started out in a growth fund and reduced their level of risk as they got older, they would accumulate an average $320,000 in KiwiSaver – a so-called ‘Life Stages’ or Life Cycle’ strategy. By comparison, those investors are currently automatically placed into conservative funds and are building only a $248,000 nest egg. Therefore missing out on around $72,000 each, or $13.8 billion collectively.
We agree in principal with the Life Cycle strategy for KiwiSavers. However, it is not necessarily the best for every investor. For example; someone who is really conservative by nature might prefer to sleep at night rather than make better returns, but with higher volatility, over time. Also, KiwiSavers may be able to withdraw all of their contributions, their employer contributions and fund gains to purchase their first home. It would be a mistake for these people to save into a growth fund, because it may lose value just before the money was required.
Retirement Commissioner Diana Crossan said the original concept of a default fund did not envisage something investors would remain with for their whole working life. Ms Crossan’s understanding is that people would go into a default fund and then take advice to determine the most appropriate fund. But this doesn’t really happen – of the 88,000 people enrolled in default funds in 2010, only 16,000 (18%) have switched into another fund.
Government regulation states that only Authorised Financial Advisers (AFA’s) can give recommendations to KiwiSaver investors. KiwiSaver default providers don’t necessarily employ AFA’s. If they do, they may not encourage the AFA’s to go through quite an involved process to help investors determine the most appropriate investment.