Savvy decision-making skills and financial independence are essential ingredients of sustainable communities. Retirement savings outcomes will be significantly impacted by decisions made today, so as a responsible employer what are your options?
The vast majority of New Zealanders are enrolled in KiwiSaver and KiwiSaver account balances are growing at a rapid pace. Collectively, over $4 billion of new contributions are accumulated each year. With close to 200 KiwiSaver funds on offer, it’s an overwhelming task to choose one that fits and then to keep track of it. It’s easier, if you know how.
KiwiSaver funds come in all flavours. For instance, over the last five years, returns from funds have ranged anywhere from under three per cent p.a. to over 20 per cent p.a. Or, consider this: at the expensive end of the range, funds are ten times as expensive as funds at the cheaper end.
So, what impact does this have on your employees’ retirement savings? Say you have a staff member who is 30 years old today, on a $60K salary and contributing the minimum 3% to a KiwiSaver fund, with a matching contribution from you as their employer.
If their chosen KiwiSaver fund earns five per cent p.a., by the time they retire they will have a balance of around $340,000. On the other hand, in a fund earning eight per cent p.a., their balance at retirement would be around $675,000 – effectively doubling their potential. That as a result of just a three per cent p.a. difference!
Binu Paul, of SavvyKiwi, an independent source of personalised KiwiSaver information, says, “The trick is to know what to look for, what is relevant to you as an individual and avoid getting influenced by anyone getting paid commissions from providers to sign you up. While there are a range of different fund types to choose from, there are only a handful of concepts that determine the best outcomes for you.”
Yet, most likely your employees have responded to the challenge of managing their KiwiSaver by simply choosing one at random. For those employees who haven’t, the IRD would have chosen one at random for them.
No wonder there are more than 500,000 Kiwis invested in ‘default’ funds, which for the most part are very conservatively managed and have been earning around three per cent p.a. over the past five or so years.
Three tips on KiwiSaver
SavvyKiwi suggests these three tips your employees should be looking at.
- The length of time before they can, or need to, access their KiwiSaver balance will determine how long their savings will be invested. This has a bearing on what type of funds to choose. A 30 year old today would normally have another 35 years before they can access their savings. This could mean that they can afford to be invested in a fund that has a larger allocation to growth assets, such as shares. But, if they need it for a first home withdrawal in 12 months time then their investment timeframe would be only a year, rather than 35 years. In that instance, being in a conservative fund may be wise.
- Choose certain fund characteristics. Some funds are ‘actively’ managed while others are ‘passively’ managed or ‘passive’ managed. Some charge ‘performance’ fees, others don’t, some charge ‘exit’ fees and other special fees and costs, but not all do. There are also ‘ethically’ managed funds.
- Finally, they should look at how well the funds are managed, including the people managing the fund, the business and investment processes they have in place and their track record.
While this could be time consuming, it’s a worthwhile exercise as the implications in the longer term are pretty substantial.
Free KiwiSaver seminars for staff
SavvyKiwi has been conducting free educational seminars for businesses interested in empowering their employees to make the best decisions about KiwiSaver. With no affiliation to any provider, these seminars simply step attendees through what happens to their money once invested, explains what to look out for and busts a few myths for good measure. For bookings, contact firstname.lastname@example.org.
Thank you to Binu Paul of SavvyKiwi for providing this article.