Many KiwiSaver members still have their savings sitting in a default fund: a fund that contributions automatically went into if they didn't make a choice before or after their KiwiSaver started.
However changes brought in by the Government this week mean that default fund will change. This could provide a good opportunity for savers to check their portfolio and see whether they're making the most of KiwiSaver.
From 1 July 2021, KiwiSaver investors with savings sitting in a default fund will find their retirement nest egg - or savings towards a first home - invested in a 'balanced' rather than a 'conservative' fund.
The Ministry of Business, Innovation and Employment (MBIE) confirms that around 400,000 existing KiwiSaver investors are in this situation. Unless they make an active choice, the fund that their savings are invested in will increase in risk.
Speaking to Newshub, KiwiSaver experts said they support the change and agree that a balanced fund would provide a higher return in the long-term. But for investors nearing financial milestones, it's not a one-size-fits-all solution.
Tom Hartmann, managing editor, Sorted at Commission for Financial Capability (CFFC), said that the change highlights the need for investors to take an active role in choosing the right fund for their needs.
"We've seen many members defaulted into a conservative fund unknowingly," Hartmann said.
By not making a choice, members who have decades to go before they retire have effectively been "missing out" on potential returns that investing in higher-risk assets, like shares and commercial property, bring.
"The move to a balanced portfolio for those defaulted into the scheme is welcome: we expect that many investors will achieve better results over the long term," Hartmann said.
Confirming that the average 'balanced' fund is made up of around 50/50 fixed interest and shares, Sam Stubbs, managing director of Simplicity said that the way to describe the difference between the funds is "volatility".
"Broadly, over the long-term (20 years' plus), you can expect a balanced fund would return about 1 percent [more]," Stubbs confirmed.
The following questions and answers provide more information about KiwiSaver default funds, potential returns and making changes.
How do KiwiSaver investors end up in a default fund?
KiwiSaver is an opt-out scheme: new members (employees) are automatically put into KiwiSaver unless they decide not to join.
Upon enrolment, if a fund isn't actively chosen, Inland Revenue allocates the member into one of nine default schemes.
A spokesperson at MBIE confirmed that unless they opt-out by actively choosing a fund, members in default schemes will be shifted to a balanced fund from 1 July 2021.
"[KiwiSaver investors] who have previously made an active choice to remain in a default conservative fund will remain in a conservative fund," the spokesperson confirmed.
Who are 'default' KiwiSaver providers?
There are currently nine default fund providers and their terms expire on 30 June, 2021.
The default providers are: AMP, ANZ, ASB, Booster, BNZ, Fisher Funds, Kiwi Wealth, Mercer and Westpac.
Example of return from a 'conservative' vs. a 'balanced' fund for a 20-year-old
For a 20-year-old earning $40,000 per year, contributing 3 percent (plus 3 percent from their employer), at age 65, the estimated balance from a 'balanced' fund is $541,191.
If the investor were in a 'conservative' fund, the estimated balance at age 65 is $425,684 ($115,507 less).
Source: Sorted online KiwiSaver savings calculator (not adjusted for inflation).
"Someone in a balanced fund for their working life would be around $116,000 better off than [in] a conservative fund," Stubbs said.
"Adjusted for inflation, it's a $47,000 difference: $222,000 in a balanced fund vs $175,000 in conservative fund," Stubbs estimates.
Although being in a balanced fund carries more risk, he advises investors to consider the extra money gained over the total investment period. If members are nearing retirement or want to apply for a First Home Withdrawal, the type of fund (level of risk), can then be reviewed.
How can KiwiSaver members in a default scheme 'opt out' of a balanced fund?
An MBIE spokesperson confirmed that if members in default schemes don't want to be in a 'balanced' fund, it's easy to opt-out.
Members can simply confirm to their KiwiSaver provider that they want to stay in a conservative fund, or choose a different provider who offers this type of fund.
"Either of [the first two] actions would shift the member to being 'active' and make them unaffected by the change."
"If a member doesn't opt out [in time] and is transferred to a balanced fund, they can switch from that fund to any other, including back to a conservative fund."
How often should KiwiSaver be reviewed?
KiwiSaver is built for two goals: buying a first home and saving for retirement.
"Investors need to adjust their level of risk in line with either of these two goals," Hartmann said.
"When their goals [move] closer and it's vital their money is there, we advise [them] to review their fund type each year," Hartmann added.
What fund might suit a KiwiSaver investor over age 50?
While age is a factor, the most important question is how soon the money is needed.
"For example, if a 66-year-old retiree is investing money to use in later retirement, they may still appropriately decide to hold a greater proportion of growth assets, in order to take advantage of market returns for later in life," Hartmann said.
If the money is needed in the next 12 months, this requires a more conservative investment so their balance is not at risk if the market takes a downward turn.
To help KiwiSaver investors choose the right type of fund for their situation, the Sorted website contains a useful tool.
"We [also] recommend they get personalised advice," Hartmann said.
"As the distance to their goal changes, we recommend reviewing the level of risk they're exposed to and switching funds if appropriate."
Following the announcement on KiwiSaver changes for mid-2021, Richard Kilpin, CEO of the Financial Services Council (FSC), said that while the long-term benefits of moving default funds to balanced are valid, unless properly assessed, excluding fossil fuel investments from default schemes could have a negative impact on returns.
"Research commissioned by the FSC in 2017 found that New Zealanders want certainty with KiwiSaver, want it to not be politicised, and want it to be stable and focused.
"There's a risk that the fossil fuel decision may lead to a greater politicisation of KiwiSaver and the potential for reduced investor confidence," Kilpin said.
Kilpin said that the Government should be clear about how fossil fuel investment restrictions are defined and assess the impact on KiwiSaver performance.
"Without these questions answered, there's a real probability that this move will be seen as a political call, rather than a rigorous well-thought out investment decision," Kilpin added.
Current Government figures show that around 690,000 people having their savings invested in a default KiwiSaver fund. Of those, around 400,000 haven't chosen to stay there.
People who haven't made an active choice for their KiwiSaver fund are encouraged to do so - and all KiwiSaver members are encouraged to review their fund regularly: around once a year as they approach major milestones.
The changes will affect KiwiSaver members of default funds from 1 July 2021 who haven't actively chosen a fund. Members can choose to stay in a conservative fund by simply contacting their provider. If they do nothing, savings will automatically be invested in a balanced fund.