The number of KiwiSaver members switching funds is on the rise, with over 2000 having switched five or more times in a year, a trend experts say is costing them potential gains.
It comes as the COVID-19 pandemic has caused market prices to fluctuate and KiwiSaver members to be concerned about how this affected their savings.
A 2020 KiwiSaver report released by Financial Markets Authority (FMA) in October shows that in the year to March 31, 256,393 members switched the type of fund their savings were invested in, an annual increase of 54 percent.
The report captures the first five days of COVID-19 lockdown. Anecdotally, providers told the FMA that's when switches between KiwiSaver funds increased dramatically.
But most concerning was the number of members who switched more than once over the year. According to the report, 33,371 members switched funds twice, 7513 switched three or four times and 2097 members switched at least five times.
Mint asset management head of sales David Boyle said as switching funds removes savings from the market for a short period, members lose the opportunity for market gains.
This is especially true if members switch to a fund that has a different percentage invested in cash, bonds, shares and/or property.
"If they're switching to a different asset allocation (e.g. from a 'growth' fund to a 'conservative' fund), they could realise some losses. This will be reflected in their balance without them even knowing it," Boyle said.
National Capital founder Clive Fernandes said members should also be aware that switching funds can cost more in transaction fees. These are deducted automatically from members' accounts.
"While small, these transaction fees add up and drive up the costs for all members in the fund, not just the switchers," Fernandes said.
"To ensure the costs are borne by those who are switching, some KiwiSaver providers are [implementing] 'swing pricing'," he added.
Members should also bear in mind that stock prices generally change daily. When members ask to switch funds, units are sold based on the current market price. This is likely to be the price on the next business day. If prices go up, gains are lost. This is the case even if members switch back to the same fund after markets recover.
"For example, in the last month, a lot of days have had stock movements of 1 percent or more.
"The best days in the market usually follow the worst ones," Fernandes said.
But is there a right time to switch funds? According to the experts, the decision should be based on financial goals, not what markets are doing.
"For example, as you get closer to buying a first home [or retirement], you need to slowly reduce the amount of growth assets in your KiwiSaver fund," Fernandes said.
Similar to switching KiwiSaver funds, switching providers also removes funds from the market, although the benefits may outweigh the cost. Providers have up to 10 days to make the transfer, but in practice, Fernandes said funds are generally out of the market for a couple of days.
Members are urged to check they're in the right fund for their circumstances and to choose a provider who can answer questions, and provide personalised advice. Online tools such as Sorted smart investor provide a useful comparison for KiwiSaver members.
"Once you've made your choice, stick with it unless your circumstances change, or you feel that your provider isn't delivering to expectations," Boyle added.