Thousands of KiwiSaver members are still on track to miss out on hundreds of thousands of dollars by the time they retire, despite Government efforts to address the problem.
There are now 3.168 million people in KiwiSaver, of whom just under 300,000 are in default funds.
Default funds are those that people are placed into automatically when they join the scheme. These funds previously had a conservative setting, but that was changed last December, to make them balanced.
At the time, then-Commerce and Consumer Affairs Minister Kris Faafoi said he hoped it would mean a significant improvement in outcomes for investors.
Conservative funds invest in things like bonds, cash and term deposits which tend to be less volatile but also offer lower returns over time. Morningstar expects these funds to have a return, per year over 10 years, of 5.3% before fees and taxes.
Balanced funds have a more even mix with more investments in things like equities as well. These have an expected return of 6.6% a year.
But investment experts say neither of these options is the right solution for people for whom KiwiSaver is a long-term investment, who would be better off putting their money into a growth or aggressive fund, with much more exposure to stocks, and an expected annual return of 7.9%.
These have more volatility but should deliver a better outcome over time.
Rupert Carlyon, founder of KiwiSaver provider Kōura, said people who stayed with a default fund instead of moving into a growth one early in their investing lives could end up with a balance that was “massively smaller”.
He said the difference was not as big as when default funds were conservative, but was still significant.
“The numbers we did showed the difference between conservative funds and what we would call appropriate was $200,000 to $300,000 – now it’s half that because a balanced fund is expected to deliver significantly better returns. But a balanced fund is still not the right choice for the majority of people.”
People starting out in KiwiSaver were often 10 years away from wanting to withdraw for a first home, and decades from retirement, which gave them time to take more risk.
He said there should be more pressure on default providers to help people make an active choice.
Murray Harris, head of KiwiSaver at Milford, took the example of someone who was 35 with a $20,000 balance and earning $55,000 a year, contributing 3% of their income.
“If you look at the latest Morningstar KiwiSaver Survey as at September 30, the 10-year average return for a balanced fund has been 6.4% and the 10-year average return for a growth fund has been 8%.
David Boyle talks about why people might not be contributing to KiwiSaver
“So in round figures if you compare a 6% p.a. return with an 8% p.a. return the difference is $456,371 versus $682,671 at age 65, or $226,000 more to enjoy in retirement if you were in a growth fund. That’s a significantly better quality retirement.
“That is why we say even with the new default setting of balanced, its really important that people get advice on their KiwiSaver to ensure they are in the right fund for their risk appetite and so they maximise their nest egg to fund the retirement they dream of.”
Carlyon said anyone who had not yet had contact with their provider to sort their fund choice should look at the options online and find a fund that was a good fit.
“There’s no reason to stick with your default provider. It takes two minutes to switch.”
Read More: Thousands of KiwiSaver members ‘still missing out on hundreds of thousands of dollars’