Many people are missing out badly on their KiwiSaver accounts.
OPINION: Thousands of people are in the wrong kinds of fund and are therefore forgoing a good slice of their retirement savings. In some cases, hundreds of thousands of dollars are at stake.
Research house Morningstar does a quarterly KiwiSaver survey. The latest report for December 2013 showed the continuation of what I think is a crazy situation: Of the $17.6 billion in KiwiSaver, almost $6b is in conservative funds. That means that over one-third of KiwiSaver money is in low-returning funds.
This is ridiculous because, for the vast majority of people, superannuation is a long-term investment.
There are a couple of exceptions: Those using KiwiSaver as a vehicle for saving for their first house and older people who are within a few years of retirement age.
However, everyone else is investing for the long term and so should be in much higher growth funds. It seems to me that the main reason for so much money in these conservative funds is that those KiwiSavers who do not nominate a fund provider are plonked into a default fund (all of which are conservative).
Large numbers of these people simply never get around to shifting out of their default funds so, out of inertia, remain with them.
In the long run, returns from a conservative fund are likely to be much lower than a more growth-orientated fund.
Morningstar's latest survey bears this out: The average conservative fund over the last five years returned about 6 per cent while the average for growth and aggressive funds returned about 10 per cent. This is the sort of performance difference that you would expect between these types of funds - over years and decades, you would expect the investment return difference between an aggressive fund and a conservative fund to be about 3 to 4 per cent.
To some people that may not seem much, but the reality is that it is a great deal - a fund that is returning 10 per cent is getting over 50 per cent more than one returning 6 per cent.
I called Morningstar and asked it to analyse how much people would be missing out on. To do this we assumed that someone is earning $50,000 a year and is contributing 3 per cent to a conservative fund which earns 6 per cent.
At the end of 30 years this KiwiSaver will have $228,000 in the account. However, if the same person went into an aggressive fund and the fund earned 10 per cent there would be $438,000 in the account.
That's about $210,000 left on the table for want of simply changing to the right fund. For my money, the 20 minutes that it will take you to switch is well worthwhile!
There are a number of assumptions that we had to make for these calculations, especially on tax. However, the numbers are about right for most people - KiwiSaver funds are mostly invested for a long time and so the rate of return is crucial.
It is easy to switch KiwiSaver funds. It may be that you stay with the same provider and move fund type, but even if you shift to a new provider, there is little trouble changing.
In the long run, high returns come from a portfolio heavily laden with shares and property. They will also come with a good deal of volatility but, for long-term KiwiSaver accounts, you ought to be able to ignore the volatility recognising that the uncomfortable rollercoaster will eventually deliver a much better result. This also means that even those whose KiwiSaver accounts are in moderate or balanced funds (another third of KiwiSaver money) ought to consider upping the ante to more aggressive funds.
Martin Hawes is an authorised financial adviser. A disclosure statement is available on request and free of charge, or can be found at martinhawes.com. This article is of a general nature and is not personalised financial advice.
- Sunday Star Times