The missing piece of the KiwiSaver discussion
Last week the Financial Markets Authority (FMA) released their annual KiwiSaver report with a key takeaway being that of the $57 billion Kiwis have invested, $480 million was collected in fees by KiwiSaver providers last year (around 0.8% of total funds invested).
We find news around KiwiSaver tends to be cyclical – when the discussion in the media isn’t about fees, it goes to performance before coming back to fees again.
Fees and performance are important considerations when choosing a KiwiSaver provider, but we at FoxPlan believe Kiwis are not getting the full picture in the media around the single most critical factor – fund suitability.
What else do I need to consider?
Fund suitability is simply being in the right type of fund allocation for your current life stage.
For any long-term KiwiSaver, fund suitability is the measure that will drive a difference usually in the hundreds of thousands of dollars range. To understand suitability, it’s important to know the usual types of KiwiSaver funds that are offered by most providers:
Default (Defensive): lowest return/lowest volatility – KiwiSavers are entered into this type of fund generally when they sign up to the scheme or change providers without instructions
Conservative: lower return/more volatility – this fund type is usually appropriate for those very near to retirement or looking to use KiwiSaver for a first home deposit
Balanced: moderate return/moderate volatility – a fund type for those with retirement on the horizon or that do not wish to be subject to major volatility
Growth: high return/high volatility – appropriate for investors with a long-term investment horizon (10+ years)
If we use the FMA’s KiwiSaver Tracker data, a stark contrast emerges around the difference each fund type can have (returns based on a 5-year average). If we assume performance in the middle of the road and apply this to a $100,000 fund with absolutely no contributions for a five-year period, the end dollar values show it all:
Default (Defensive): 0 - 9.9% growth $105,000
Conservative: 10 - 34.9% growth $122,500
Balanced: 35 - 62.9% growth $148,950
Growth: 63 - 89.9% growth $176,450
We know that already over 400,000 New Zealanders are in a default KiwiSaver fund (more than 10% of KiwiSavers). It’s likely a great deal more are also in other inappropriate types of funds for their stage of life.
A bit more on Fees
An apples with apples comparison between providers is not always easy to do. Many funds offer additional benefits such as direct access to KiwiSaver advisers, accidental death insurance cover or accessibility to reduced mortgage rates.
It’s also important to understand that fees for growth and balanced funds will be higher than default and conservative funds. These fund types require higher levels of oversight and analysis to ensure KiwiSavers are getting value for their money so carry higher administrative costs.
Finally, providers in the market vary by investment approach. Funds such as Booster invest directly into New Zealand through purchasing assets such as Kiwifruit orchards in the Bay of Plenty and funding Research & Development at Victoria University’s VicLink. Some providers take a far more hands-off approach with investment decisions, and others somewhere in the middle.
When considering fees, our key message is to do your research and ask what value you are getting from your provider.
Our advice
KiwiSavers should always make their decision on their fund provider based on fund suitability first and foremost – not switch their provider solely due to fees or performance.
We also recommend that if your provider doesn’t give you the proper resources to determine a suitable risk profile – keep looking! Whether you are signing up online or by paper, you should always be given adequate tools to help determine your own fund allocation (click HERE to see an example with Booster’s handy Risk Profiler tool).
Finally, if you’re not sure – come and have a chat with us. Send us an email at info@foxplan.nz to speak with one of our KiwiSaver advisers today – it costs you nothing and could be worth thousands for your future.