Since an employee’s retirement savings outcome is ultimately impacted by decisions made today, some employers may feel the need to help their employee’s find a fund that best suits their financial situation.
It is more than likely that the majority of a business’s employees respond to the challenge of running their KiwiSaver by simply choosing one at random. For employees that opt to avoid making this decision, the Inland Revenue Department usually assigns a fund at random for them.
The number of New Zealanders who enrol in some kind of KiwiSaver fund is growing at a rapid pace. And with almost two hundred KiwiSaver funds currently on offer, it can often feel like quite an overwhelming task to choose a fund that not only fits an individual’s circumstances but is also easier to keep track of.
There are many kinds of KiwiSaver fund options to choose from, with returns from funds ranging from under three per cent to over 20 per cent p.a. Some funds are even as much as ten times more expensive than others.
Therefore, it is important that employees choose the right fund to avoid missing out on increasing their potential. For example, an employee may be on a $60K salary, contributing the minimum 3% to a KiwiSaver fund and have a matching contribution from their employer.
If they choose a KiwiSaver fund that earns five per cent p.a., they will have a balance of around $340,000 by the time they retire. Alternatively, if they were in a fund that earned eight per cent p.a., their balance at retirement would be around $675,000. This significant increase is a result of just a three per cent p.a. difference.
To avoid ending up in a ‘default’ fund, employees need to know what to look for, what is relevant to them as an individual and avoid being influenced by those who receive commissions from providers. Even though there is a range of different fund types to choose from, there is only a handful of concepts that can determine the best outcomes for an employee.
The length of time before employees can or need to access their KiwiSaver balance determines how long their savings will be invested. Understanding this can help narrow down the type of funds to choose from. For example, a 25-year-old employee may work for another 40 years before accessing their savings. The employee may be able to invest in a fund that has a larger allocation to growth assets. However, if they require funds for a first home withdrawal, their investment timeframe may be only a year, rather than 40. If this is the case, choosing a conservative fund may be the better option.
Employees should also base their decision on a fund’s characteristics and how well it is managed. Funds can be ‘actively’ managed, ‘passively’ managed or ‘passive’ managed. Some may charge ‘performance’ fees, ‘exit’ fees or other special fees and costs.
While finding the right KiwiSaver fund for an employee can be a time-consuming process, it is a worthwhile exercise since implications in the long term can be quite substantial.