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Default fund KiwiSavers are getting a raw deal: Milford

Newsroom logo Newsroom 4/03/2019 BusinessDesk
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KiwiSavers in default funds are getting a raw deal and the government needs to acknowledge the default fund system doesn’t work, according to investment company Milford Asset Management.

“Everyone in the KiwiSaver industry needs to be concerned about the huge number of KiwiSaver investors who are languishing in default funds earning low returns,” says Milford’s head of wealth management and advice, Murray Harris.

“It should be obvious to everyone that the default system just doesn’t work. It’s leaving many KiwiSaver investors worse off and, as a country, that’s something we should be deeply concerned about and something we have to fix,” Harris says.

Currently, all new employees are automatically enrolled in KiwiSaver, unless they’re already enrolled or actively choose to opt out.

If they don’t specify a manager, Inland Revenue assigns their savings to one of nine default funds which are mandated by the government to be run as conservative funds.

Morningstar’s latest survey found the average annual return of those default funds over five years after fees and before tax was 5.2 percent.

This contrasts with top growth funds returning almost double that. 

For example, the five-year annualised return from the Milford growth fund was 10.3 percent, while its balanced fund achieved 8.9 percent, and its conservative fund 7.9 percent.

The question of default fund allocation should be at the top of the government’s agenda in its current review of default funds, Harris says.

“Aside from people who may be planning a first home withdrawal in the immediate future, people who have decades to go until retirement should not be in a conservative default fund. They’re getting a raw deal,” Harris says.

Because KiwiSaver is a long-term proposition for younger workers, even slightly better returns can make an enormous difference to their retirement savings.

“We’re talking tens and, in some cases, hundreds of thousands of dollars more for their retirement.”

Investment research company Morningstar last week rated Milford the best KiwiSaver manager of the year for the fifth time, with the returns of each of its conservative, balanced and growth funds ranking first.

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