Safest saving option may not work for you
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
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.