Switching KiwiSaver shouldn’t be done lightly. There’s a lot to compare, so be clear when you do your analysis. You’re considering two things:
Am I in the right Kiwisaver fund?
The right Kiwisaver fund for you will depend on your own personal financial situation and comfort with volatility. You should seek professional advice to help determine the right mix of Kiwisaver assets for you, so be aware that the below information is general only.
A lot of Kiwis are in conservative funds because that’s what they were auto-enrolled into. Broadly speaking, a conservative fund is most likely to suit three main groups of people:
- It’s likely to suit those who really can’t sleep at night if their balance might fall temporarily,
- It’s likely to suit those who plan to use their KiwiSaver funds in the next five years to buy a home and don’t want to risk a 20 per cent fall just before they withdraw.
- It’s likely to suit people within 10 years of withdrawing their money for exactly the same reason.
At the other end of the scale some Kiwis are in far more volatile funds than they can really stomach. They think they can weather the next GFC psychologically, but when it comes to plunging balances they may not be able to sit tight and wait for the value of their fund to rise.
It’s best to do a risk tolerance test before switching. A financial adviser can do a risk tolerance test for you. But some may only want to deal with people who have $100,000 or more to invest. There are free risk tolerance tests online. Some are better than others and we can’t recommend them. The public can pay to use the Finametrica www.myrisktolerance.com website. It offers the same risk tolerance test that many Kiwi and Aussie financial advisers use on their clients.
If you find at the end of your analysis that you’re simply in the wrong Kiwisaver fund, then you can stay with your existing provider and switch between funds. Switching Kiwisaver is usually free of charge, but do check first.
Am I with the right Kiwisaver provider?
Not all KiwiSaver funds are created equal. Two apparently similar balanced funds, for example, might be growing at different rates. That could be due to investing choices made by the provider’s staff. Or it could be due to layers and layers of hidden fees (and the obvious ones as well). For this reason some investors prefer lower fee passive KiwiSaver funds that follow and index rather than more expensive to run active ones where clever fund managers try to “beat the index” by choosing high growth investments. Either way you can compare KiwiSaver funds and fund managers here on CANSTAR’s website.
Check the fees. There’s a great fee debate going on with KiwiSaver. Looking at management fees, administration fees, expense fees, trustee fees and annual member fees, CANSTAR has calculated that for a KiwiSaver member with an account balance of $11,500 in a balanced fund, average annual fees would be approximately $154. The average cost, though, does hide significant differences in the level of fees charged between products. All other things being equal, those differences can eat into your retirement savings over time. There are arguments for and against high fees. Some KiwiSaver providers argue that their (higher) performance fees based on how well their funds do ARE worth it for investors in the long run because their returns will they say be higher. Do consider the KiwiSaver fees listed in our 2016 KiwiSaver star rating report. Fees can mean many thousands of dollars difference in how much money you get out of KiwiSaver at the other end in retirement (or when you buy your first home).
Another issue in the news is unethical investments. If you want to put your money where your morals are then you might need to switch to a more ethical provider or fund.
Sometimes going with the bank can be the right answer. Non-bank KiwiSaver providers are outraged that banks try to steal their KiwiSaver clients. In fact the regulator, the Financial Markets Authority, has warned banks about signing up customers by subterfuge and other means. Non-bank KiwiSaver providers argue that the banks’ products aren’t as good as theirs. Sometimes, however, the bank might be the right answer. With children, for example, it might be worth holding their KiwiSaver at the same bank where their online banking is. That way they can watch their balance grown on their online banking app and transfer a percentage of their own pocket money and earnings into KiwiSaver regularly with ease. Financial commentator Mary Holm argues conversely that the ability to check your KiwiSaver account too frequently can backfire because of the temptation to switch too often.
Don’t chase Kiwisaver returns alone
Before you decide whether to switch or stay give a thought to the issue of “chasing returns”. KiwiSaver ‘switchers’ may lose money by making a very common psychological mistake. That is chasing last year’s returns. You’ll often hear in investing that “past performance is no indication of future performance”. Too often KiwiSaver investors see that another fund or style of fund has been doing better over the past few years than the one they’re in. Chances are, however, that as soon as they switch the new fund has a bad year or years.
It’s like driving with your eyes in the rear vision mirror. That’s fine for a while, but can be disastrous. During the GFC, for example, conservative funds with very little money in shares did much better than balanced and growth funds. Investors switched from growth AFTER their funds had lost money and missed out on the upside as their investments bounced back up. Likewise you might move from one provider to another after the new fund had a stellar few years. What you don’t realise is that the whizzkid fund manager responsible for the great returns has moved on. Jumping in and out of funds in this way doesn’t always pay off. By all means review your KiwiSaver each year, but ask yourself questions if you’re constantly switching. KiwiSaver is a long term investment.
If all of this is too much of a faff, choose a “life stages” KiwiSaver fund. This is a type of fund provided by a number of KiwiSaver providers that automatically changes as you grow older. Your money starts off in a growth fund and as you age, your accumulated funds are switched into balanced and then conservative funds automatically. The problem with life stages funds is that many assume you’re going to retire at 65 or you’ll need that money at 65. If you’re going to work until 70 and have other investments, for example, your KiwiSaver money will be shifted into balanced and conservative years earlier than needed, most likely depressing your investment returns. At least one life stages fund allows you to set your retirement date later than age 65, which solves the problem.
Finally, do it this weekend! Or if you can’t, at least put a date in your diary for annual financial spring cleaning when you can rubberstamp or otherwise your KiwiSaver investment decision.