A group of nine financial advisors recently unearthed a startling discovery for KiwiSaver members.
They’ve found that a huge number of members — about half a million — have been duped into using the wrong type of account…and this error has cost members approximately $830 million over the past six years.
That’s roughly $2.7 million down the loo each week.
The worst part? The error hasn’t been fixed yet.
The Financial Markets Authority (FMA) and the Finance Minister have both been alerted, but no action has been taken yet.
What happened?
When you invest in KiwiSaver, you’re able to put your contributions into five types of funds. As noted in the website:
Defensive funds hold 0% to 9.9% in growth assets. These are generally suitable if you:
- Don’t want your KiwiSaver account to ever go down (although there are no guarantees), even though that means your account almost certainly won’t grow as fast, over the long term, as accounts in riskier funds
- Expect to spend your KiwiSaver money in the next three years
Conservative funds hold 10% to 34.9% in growth assets. These are generally suitable if you:
- Are willing to take on some ups and downs in value, and are seeking average long-term returns a bit higher than in a defensive fund but probably not as high as in riskier funds
- Expect to spend your KiwiSaver money in the next two to six years
Balanced funds hold 35% to 62.9% in growth assets. These are generally suitable if you:
- Are middle of the road, comfortable with seeing your account value sometimes fall a little and seeking mid-range long-term returns
- Don’t expect to spend your KiwiSaver money within the next 5 to 12 years
Growth funds hold 63% to 89.9% in growth assets. These are generally suitable if you:
- Are looking for fairly high growth over the long term, and won’t want to switch to a lower-risk fund whenever you see your account balance fall quite a lot
- Are intending to leave your money in KiwiSaver for at least 10 years
Aggressive funds hold 90% to 100% in growth assets. These are generally suitable if you:
- Are looking for strong long-term growth, knowing you will stick with your fund even when your balance falls fast
- Are intending to leave your money in KiwiSaver for at least 10 years
When the KiwiSaver system was created, organisers made a temporary holding area for new members or members who’ve recently changed jobs. It was meant to be a ‘parking area’ for members before they chose their desired fund type.
While you were in limbo, you were automatically assigned to a default fund. That way your contributions would at least create some minimal returns before you moved them to a different, more personalised fund.
Well… here’s where the first mistake was made.
The government trusted the default fund providers to educate the members and facilitate the transition to a more appropriate fund.
These providers didn’t do that.
Why would they?
There’s a clear conflict of interest. A good chunk of these default funds invested in the banks’ own products. 34% on average.
If the bankers moved members from the default account to a more balanced account, only 12% of the funds were invested in the banks’ products.
In other words, this ‘temporary holding area’ became a major cash cow for the banks. Bankers realised that the longer people were in the default funds, the more money they could direct to themselves.
They had no incentive to move you to the right fund when you’re blissfully ignorant sitting in your default fund.
So the result is that nearly half a million members continue to be parked in the default fund. [openx slug=inpost]
What’s so bad about that?
The default fund is terrible for most people.
It’s very conservative and is designed to make sure you don’t lose money…not make money. Your savings would be mainly in cash or bond investments
You probably want to put your savings to work, generate some compounding returns. That’s a reasonable expectation of retirement savings.
(Of course, it’s possible you don’t care about returns. You might prefer to simply protect your deposits and minimise risk. In that case, this fund might actually work for you.)
For the rest of us, we want to see our nest eggs grow.
Unfortunately, for the half million victims stuck in this default holding area, their savings have been stagnant, waiting to be deployed.
And that means these people have missed out thousands upon thousands of dollars in returns.
The NZ Herald explains, ‘An individual earning $40,000 a year could be potentially be [sic] $6000 worse off while someone on $60,000 a year could potentially be $8100 worse off.’
Inexcusable.
What about taxes?
The financial advisors investigating this issue also found another alarming detail.
When new members join the KiwiSaver scheme, they are automatically assigned a prescribed investor rate. It’s up to you, the member, to determine your correct rate and adjust the setting in your account. If you don’t, you’re automatically assigned to the highest possible tax rate, 28%.
According to the advisors, this has resulted in the victims overpaying their taxes by $100 million.
And there’s currently no way to claw back overpayments.
So if you’re one of the many victims stuck in the underperforming default fund, it’s very likely you’ve also been overpaying your taxes.
The spokesman for the advisors, John Cliffe, said it well, “It is both an inexcusable and continuing problem. The ethical standard of our industry has not been met by some of its most important institutions and government bodies.”
What can I do?
Your first action should be to check your account.
You can do so online via the IRD website.
Check to see if your destination fund is one of the conservative funds as opposed to your preferred fund.
You should also check your prescribed investor rate (PIR). The IRD provides this page to help you decide if you’re using the correct rate.
Best,
Taylor Kee
Editor, Money Morning New Zealand
PS: If you discover that you have been the victim of this scandal, let me know. I want to hear about it. Reach me at letters@moneymorning.co.nz.