Are you missing out on $1m?
I’d do anything for love. Would you? Then get your kids out of KiwiSaver default funds. You’ve guided them into signing up. Tick. You’ve got them putting in the maximum they can afford. Tick. But you’ve got no idea what sort of fund they should be in.
Two out of three ain’t bad? Well, it might be okay if you’re Meatloaf, but it falls short when it comes to investment. A million dollars short for some.
Hey you. Yeah you, in the default fund.
New Zealanders have $38 billion in KiwiSaver and $10b sits in very low-risk, conservative or default funds. Roughly a quarter of the money is stashed in a place unsuitable for the vast majority of people. So what’s the big deal? Surely it’s another one of those bland things that won’t kill anyone.
Dead right. Very few people measure the opportunity cost of lost returns over 20 or 40 years. That’s the very reason inertia exists. Neither the Government, nor our regulator (the Financial Markets Authority) seems willing to stick their neck out.
Think back. When KiwiSaver was set up, there was a desire to be noncontentious. The money went to Inland Revenue who spun a wheel and randomly allocated people to an inner circle of default funds – all lowrisk.
It seemed like a harmless practical solution for those who didn’t pick their own manager or fund.
Now we have a $10b tsunami of inertia. That’s a lot of real people headed towards a ho-hum retirement result.
It’s as simple as this. Default funds are like one-hour parking spots. You don’t stay there all day, let alone years. Shame there is no KiwiSaver parking attendant marking our tyres and issuing tickets.
If I had my way, default funds would be balanced funds. These have around 60 per cent shares and 40 per cent bonds as a rough rule. Flick the switch in the legislation and it’s a job done.
There are very few sane reasons for anyone under the age of 50 not to have a balanced portfolio for long-term savings. When a decision is widely suitable for the vast majority, why aren’t we doing it?
I’ve harped on about it before, but I’m getting impatient. Each quarter Morningstar release the figures and I read ’em and weep. Things are getting better, but ever so slowly. In March 2013 default funds commanded 36 per cent of our money. It has edged down to 27 per cent in 2017, but for the last four quarters things have barely shifted.
Compound returns make your KiwiSaver account go like a bat out of hell.
The difference a few percentage points make over the long term is phenomenal. If you start at age 25 and invest $5000 a year for 40 years, you’ll end up putting in $200,000 of your own money. Default funds have been averaging 6.1 per cent a year and balanced funds 9.2 per cent a year (over the last five years).
What’s 3 per cent between friends? Oh, only about $600,000. Did that perk you up? Thought so.
In 40 years’ time, if these averages continue, a person in a default fund will have a portfolio worth $639,000. That’s certainly not a lemon and no one will ask for their money back, but they could be doing so much better.
The balanced fund will be worth $1,252,000 (double the amount). In the case of growth funds, a 4 per cent annual difference in returns blows out to a million dollars.
Looking in the rear-view mirror is flawed and returns over 40 years could be higher or lower than this demonstration. Regardless of where the numbers end up, the 3 per cent difference is a realistic assumption. Inertia is expensive.