The latest KiwiSaver research shows that members who are focusing only on fees and choosing low-cost providers could be short changing themselves on the net benefit they will gain towards their retirement savings.
Research house SuperRatings this week released research which ranked KiwiSaver schemes based on the net benefit delivered to a typical member over the past five years. The analysis assumes a member earning $50,000 p.a. with a KiwiSaver balance of $20,000, contributing 3% of their income and a tax rate of 17.5%. The net benefit outcome is the return to the member in actual dollar terms, after deducting fees and tax, over the past five years to 31 March 2017.
SuperRatings CEO Kirby Rappell said “…a single-minded focus on fees creates the danger that members overlook value to the detriment of their savings. Fees are not the sole determinant of value, and in fact our research shows that those funds providing the highest net benefit are not always the ones with the lowest fees.”
There has been an unhelpful focus recently encouraging KiwiSaver members to consider cost above all else when selecting a KiwiSaver provider. This latest research confirms that cost must not be the only consideration. We believe members must also consider the ability and track record of their chosen provider to navigate the ups and downs of financial markets in order to grow and protect their savings along the way.
The research also shows that KiwiSaver growth funds have delivered more than twice the monetary gain for their members than conservative funds. The top 10 growth funds generated an average net benefit to members of $14,586 over the five-year period. The Milford Active Growth Fund topped the group, delivering significantly more than the average, at $20,395.
Source: SuperRatings press release 10 November 2017.
The top 10 conservative funds delivered an average net benefit of $6,482, with the top fund producing a gain of $8,164 for members.
This illustrates one of the key issues with KiwiSaver, which has been very successful, except for one problem. There are still too many members in conservative or low risk default funds. Members are directed to these funds if they do not choose a provider or fund they want their hard-earned income to be invested with.
According to the Morningstar KiwiSaver Survey at the end of September, 25% of the $43 billion invested in KiwiSaver funds is sitting in default and conservative funds. These funds are invested in very low risk cash and bonds at a time when interest rates are at record lows. It is no surprise, that these funds have generated lower net benefit to their members compared to growth funds.
KiwiSaver members need to take a keener interest in where their money is going, so they can grow their retirement savings to help enjoy the retirement they dreamed of. Considering that 52% of KiwiSaver members have at least 20 years until they reach age 65; and 69% have 10 or more years, they have time on their side to handle the ups and downs of markets. So why isn’t there a lot more invested in the KiwiSaver balanced and growth funds?
As we pointed out in a previous blog here with the power of compounding, just 2-3 percent more in net return over time will have a significant influence on what your retirement nest egg will look like. As with most things in life, cheapest is not always the best. Don’t leave yourself short-changed when it comes to your retirement savings. It is too late at 65 to wish you’d done better.