The secret to getting KiwiSavers to switch out of default funds
The secret to getting KiwiSavers to make an active choice of fund has been found in trial by the Financial Markets Authority and KiwiSaver provider Kiwi Wealth.
The FMA is concerned that 445,000 KiwiSavers with $4.2 billion in savings still have their money in low-risk, low-return conservative "default" funds, which were supposed to be temporary holding funds while members made an active choice.
That's led to many KiwiSavers missing out on many years of sharemarket returns, which they would have enjoyed had they switched into a higher-risk balanced, growth or aggressive KiwiSaver fund.
But in a trial run with Kiwi Wealth, the FMA found that presenting new default KiwiSavers with "welcome" letters designed using "behavioural" insights lifted the likelihood of savers switching funds by 47 per cent.
It turns out the answer to getting KiwiSavers to make an active fund choice was "EAST", an acronym developed by human behavioural expert Dr Marcos Pelenur.
The "E" stands for "make it easy", so instead of giving people a long and boring spiel, KiwiSavers were given a short three-step guide to making a fund choice, and a link to an online tool they could use to switch funds.
The "A" stands for "make it attractive" which meant making the material presented to people easy on the eye.
The "S" stands for "make it social" which meant convincing people that making an active choice was what most people do. Humans are motivated by social norms, and the desire to fit in. Telling them that nine out of 10 Kiwi Wealth KiwiSavers made an active choice made people assume that was what they needed to do.
The "T" stands for "make it timely". Instead of trying to get people to make an active fund choice months, or years after they joined KiwiSaver, people are most likely to take action, if challenged to do so when they first join KiwiSaver.
Remote rural specialist nurse Jo Fortune from the Whakatane region is a Kiwi Wealth saver who was prompted to make an active fund choice, and to shift out of a default fund.
Fortune was looking at changing funds when contacted by Kiwi Wealth. Her brainy 15-year-old son had sat her down for a chat about investing, and she was already considering choosing a fund with greater exposure to sharemarkets.
"I'm not a huge risk taker, and my money is hard-earned, so I don't like to throw it away," she said.
KiwiSaver was only a part of her retirement planning, but she recognised it made sense to go to a higher risk fund, giving her a higher chance of better long-term returns, and a larger nest egg at age 65.
"I went with moderate risk," she said.
In total, 3427 new default KiwiSaver members received welcome communications, either letters or emails. Half received a standard, old-fashioned welcome communication, while the other half got the communications developed with the EAST technique.
Kiwi Wealth's Joe Bishop said: "It's that first contact that's the key. By keeping things easy and understandable, we're able to help members become more than simple savers – they become investors who are planning for, and maximising, their financial futures."
The impact on their retirement savings could be huge, Bishop said.
Kiwi Wealth's modelling suggested a 30-year-old with a $20,000 KiwiSaver balance was likely to have around $47,000 more saved at age 65 than someone in a conservative fund.
He said the cohort of people least likely to have made an active fund choice were those aged 18-34.
The FMA's Paul Gregory said: "The FMA encourages both KiwiSaver and Managed Investment Scheme providers to use these results. Making similarly simple and effective changes can help investors make better decisions."
And, he said, the trial showed Kiwi Wealth members who received the improved material were found to be 20 per cent less likely to switch to another provider.