kiwisaver, investing

Joining your employer chosen KiwiSaver scheme - a mistake?

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Do you remember why you are with your current KiwiSaver provider? Did you choose your KiwiSaver fund manager, or did your employer choose it? Or do you think you were randomly assigned one and you don’t even know why?

As we have covered previously in our blog posts, no two fund providers are the same. Therefore, it is important to ensure you choose the right one. You can do this by making sure there is a clear reason for being with your KiwiSaver provider of choice. And if there isn’t a clear reason, it is beneficial that you take the time to read through this blog post.

What mistakes do people make with their KiwiSaver money?

There are lots of ways people go wrong when managing their KiwiSaver money. For example, some might have changed to a less “risky” fund during the Covid-19 downturn. Or, others may have put their money in the wrong types of assets because they haven’t been taught the differences between KiwiSaver funds. Maybe, you assumed in the past that all KiwiSaver providers are the same, when in reality, they are not.

If you have made any of these mistakes in the past, that’s okay! At least you’re doing something about it by reading a blog post like this. This means you will be more educated in the future and better equipped to make financial decisions.

The potential error we will be covering today is different to the ones mentioned above. This possible mistake is being in the default KiwiSaver scheme chosen by your employer. It is not always an error, but could be one depending on your circumstances.

Why do people end up in their employer’s default KiwiSaver scheme?

The reason for this is because some employers have arrangements in place with a particular provider to default all their employees into a particular scheme. This means that if you are joining KiwiSaver and you are an employee, the organisation you work with will choose a KiwiSaver provider for you. This is the employer chosen scheme.

There may sometimes be advantages to joining this scheme. For instance, this KiwiSaver provider may have agreed to give some additional incentives such as financial advice to the employees that join. However, even if you get these incentives, it does not mean that your employer’s chosen scheme is best for you.

You can change your KiwiSaver provider! 

There is no obligation for employees to remain within the “default” scheme chosen for them. Just because you have your KiwiSaver money with a particular fund manager does not mean you have to stay with them for life. Employers cannot force employees to be with the same KiwiSaver provider.

If you want to change your KiwiSaver scheme, it is usually a straightforward process. Most likely, you can do this by filling out a simple form online. After filling this out, your new KiwiSaver provider and any other relevant parties will take care of the rest.

Why might being with your employer chosen KiwiSaver scheme be a problem? 

As mentioned above, staying with a KiwiSaver fund manager simply because it is chosen by the company you work for may be a mistake and it might not be ideal for a variety of reasons.

There are over 30 different KiwiSaver schemes operating at the moment. This means that if the correct research was not done into selecting the right scheme, you could easily find yourself in a KiwiSaver scheme that is not ideal.

When it comes to choosing a KiwiSaver provider, there are many factors to consider. Here are examples of four key factors:

  1. Riskiness of investment

  2. Return

  3. Fees

  4. NZ Owned

If you’d like to, you can learn more about how risky KiwiSaver is, and the differences between the returns of different KiwiSaver providers by clicking on the relevant subject you’d like to learn more about.

There is one time that National Capital believes you should stick with your employer chosen KiwiSaver scheme. That is, if you have made the informed decision based on research that your current scheme is most suited for your needs.

A note about employment restricted KiwiSaver schemes

Not all KiwiSaver schemes allow everyone to join them. Employment restricted KiwiSaver schemes are an example of this.

Employment restricted KiwiSaver schemes are ones that allow only those that work in a certain organisation or industry to be a part of their scheme, with only a few exceptions.

Where you work may make you eligible for one of these schemes. However, just because you are eligible to be with a provider, does not mean that provider is best for you.

If you want to, you can read more about employment restricted KiwiSaver schemes by clicking here.

Choosing the wrong KiwiSaver provider can impact your ability to retire comfortably

The reason that choosing the wrong KiwiSaver provider can impact your ability to retire comfortably is because return rates for different KiwiSaver providers can differ. To illustrate this, let me show you how choosing a higher returning KiwiSaver provider can make a big difference to your retirement savings.

According to Morningstar, the lowest return from a KiwiSaver aggressive fund in the last five years ending June 2020 was 5.8% per year and the highest was 9.6% per year.

We understand at National Capital that past returns do not equal future returns, so this is an illustration to get an idea of what a few percentage points can mean in the long run. Let’s assume these aggressive fund returns from the past five years will carry on for 40 years. With that in mind, imagine you invested $5,000 per year for 40 years and received 9.6% per year as opposed to 5.8% on your investment. 

With a 5.8% per year return for 40 years, you would only end up with $735,976.53 compared to $1,985,526.07 with a 9.6% return per year!

In this example, you would have earned 2.7 times more on your investment by being in the highest returning aggressive fund compared to being in the lowest returning aggressive fund!

Without research, it is hard to ascertain whether you are with a provider that might generate an above-average return, or a below-average return. That is why it is important when choosing a KiwiSaver scheme provider to be informed. National Capital can help clients who fill out our free KiwiSaver HealthCheck to be informed KiwiSaver investors.

Having said that, returns are not all that matter to everyone. Therefore, National Capital recommends several different KiwiSaver providers for different people. Ethical investors for example generally get different recommendations compared to our other National Capital clients.

The Value of Financial Advice

The value of financial advice is immense. As mentioned in this blog post here, a survey of 2,000 Kiwis showed that “those who get financial advice tend to save more, invest more, travel more, and have an overall improved well being”. Additionally, according to the Financial Services Council, a 25-year-old who took financial advice and saved $2,500 per year would be $1.5 million better off at the age of 55 compared to if they didn’t take advice. 

That's why you should fill out our KiwiSaver HealthCheck. It's our way of allowing you to find the right KiwiSaver fund and provider so that you don't miss out on extra returns.

Take the opportunity today to step towards a life of financial security by filling out our simple KiwiSaver HealthCheck. Your future self will thank you.

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Are you with the right KiwiSaver fund provider? Take our free KiwiSaver HealthCheck and find out!

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