Safest sav­ing op­tion may not work for you

Auckland City Harbour News - - OPINION -

If you are in Ki­wiSaver, be in prop­erly. Too many are only half in. For many peo­ple, be­ing in Ki­wiSaver seems to be the only choice they have made, judg­ing by the large num­ber of peo­ple in the gi­ant con­ser­va­tive ‘‘de­fault’’ funds run by AMP (in­clud­ing the old AXA one), ANZ In­vest­ments, Fisher Funds, ASB and Mercer.

The de­fault funds were cre­ated to be the low-risk funds in­vested pri­mar­ily in cash and bonds into which Ki­wiSavers who wanted to be ‘‘in’’ Ki­wiSaver but didn’t know which provider or fund to choose would be shunted.

They were to be tem­po­rary park­ing places for money un­til the in­ex­pe­ri­enced Ki­wiSavers found their in­vest­ment feet and de­cided which was the best Ki­wiSaver provider and fund for them.

As Commerce Min­is­ter

it

Craig Foss said last week when al­low­ing Bank of New Zealand, West­pac, Grosvenor and Ki­wibank to be­come de­fault Ki­wiSaver fund providers: ‘‘The pur­pose of the de­fault funds is as a tem­po­rary hold­ing fund.’’

But a lot of the in­vestors in the de­fault funds have sim­ply stayed put. De­fault funds held the bet­ter part of $6 bil­lion at the end of Fe­bru­ary, no small amount con­sid­er­ing that at the end of De­cem­ber, the Re­serve Bank said there was just un­der $20b in Ki­wiSaver. Some may have cho­sen to stay put, see­ing the low-risk de­fault funds as a sta­ble place to save their money in an un­cer­tain world.

But there’s the worry, of­ten voiced among fund man­agers (who for the record earn big­ger fees when you in­vest in their high-share funds) that over the long term de­fault funds are not the best place to amass re­tire­ment sav­ings.

Over the longer term, their mantra is that cash will re­turn less than bonds which in turn will re­turn less than shares.

Fund re­searcher Morn­ingstar sought to make the point a cou­ple of months back. It took a look at the ASB de­fault fund and asked would ASB Ki­wiSavers have lost out by leav­ing their money in the de­fault fund com­pared with hav­ing it in the ASB bal­anced fund?

As­sum­ing an $800 a week salary with 3 per cent con­tri­bu­tions from em­ployer and em­ployee, Morn­ingstar re­ported a Ki­wiSaver who had been in from the start of Ki­wiSaver at Oc­to­ber 1, 2007, and had opted for the de­fault fund would have been $1949 worse off at the end of De­cem­ber than the one who opted for the bal­anced fund.

The bal­ances would have been $26,072 and $28,021 re­spec­tively.

In­vestors in the ASB growth fund would have had $28,753.

A rel­a­tively short pe­riod of time, and past per­for­mances are no guide to fu­ture re­turns, but Morn­ingstar con­tin­ues: ‘‘As the value of Ki­wiSaver grows ... the risk pro­file de­ci­sion will be­come in­creas­ingly im­por­tant.’’

So if you are in a de­fault fund or do not know what fund you are in (prob­a­bly a de­fault fund), set your­self this task: Make an ac­tive choice.

There’s a lad­der of risk. Choos­ing which rung you fit into: Con­ser­va­tive funds (high in cash and bonds), mod­er­ate and bal­anced funds (still with cash and bonds but higher in shares), and growth funds (mostly shares).

There are also lifestages-style op­tions which start off with more shares and pro­gres­sively get less risky as you age and near 65.

The sorted.govt.nz web­site is the place to start learn­ing, but your Ki­wiSaver providers’ web­site will be a great help too. If you don’t do it, you may just get a phone call soon seek­ing to help you, as Foss has tasked de­fault providers to ed­u­cate Ki­wiSavers to make ac­tive choices.

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