An investment research firm, Morningstar, is questioning the Government's decision to focus on fees in selecting new KiwiSaver default providers after finding no historical link between low fees and better performance.
The new default funds have become balanced funds, and Morningstar has called for this change for a long time. While Investors KiwiSaver balances can be withdrawn for purchasing a property, shortening the investment horizon for some KiwiSaver investors. KiwiSaver has the objective of being a long-term savings mechanism that saves towards retirement. So, while the move to balanced funds for the default option is a step towards the right direction, it could be questioned if it is a big enough step.
"Would a Growth Fund have been a more appropriate option for the majority of KiwiSaver members?"
While there was a competitive process, the KiwiSaver provider applicants were assessed against a set of criteria. The criteria include fees, their ability to deliver the investment product, manage transitional arrangements, provide a good customer experience for their members, and the provider’s organisational structure and standing. However, it has become clear from the outcome that low fees were the leading factor that took consideration.
Milford, the best-performing KiwiSaver balanced fund provider over five years, seven years, and ten years, did not attempt to apply for default provider status. This could be because Milford knew they would have little chance of success given that its fees are some of the highest in the market in exchange for the great returns and other services.
Tim Murphy, Morningstar's Sydney-based Director of Manager Research, said that because of this:
“The process must surely come into question."
How can the Government Improve?
National Capital believes that the government should change how default providers work and allow KiwiSaver members to immediately choose their fund and provider without going straight into a default fund.
Murphy goes as far as recommending that because low fees are an essential focus for the Government in deciding on KiwiSaver default funds, then the government should consider creating and operating a central default fund itself. Here, the Government could control default fund fees without considering commercialisation. With this option, Murphy says KiwiSaver investors can then move to different fund providers if they choose to.
Impacts on default KiwiSaver Investors
Because the governments chosen funds are focused on fees, KiwiSaver investors could put into these default funds and not receive the best returns that they could obtain from a provider that is not listed as a default fund. A fund with lower fees does not mean a higher return, and although it should be taken into account, it is not the totality of why you should invest in a provider.
National Capital strongly recommends choosing a fund to invest in your KiwiSaver based on your financial situation, not remaining in a default scheme that could reduce balance at retirement. Complete a National Capital KiwiSaver Healthcheck to find the correct fund for you.