Default provider arrangements for KiwiSaver do not encourage financial literacy and should be ditched, says state-owned Kiwibank.
Those who are automatically enrolled in KiwiSaver and do not choose a scheme are randomly placed into one of six default schemes.
But the contracts for the providers running those schemes is due to run out in July next year and the Government has asked for feedback on what changes, if any, it should make.
Kiwibank, which is not a default scheme provider, stated in its submission that the structure allowed new members to slip into a default product, allowing them to never actively engage in their retirement savings and investment future.
"This means that a high percentage of default members will have little or no understanding of retirement investing and engagement in their financial future.
"The current arrangements should be replaced with a structure which promotes engagement and builds financial literacy," it said.
The bank was also concerned the structure commercially benefited a select number of providers, resulting in an uneven playing field for others and that default providers were not required to do enough to promote financial literacy despite being in a privileged situation.
But rival KiwiSaver providers ASB and Onepath, who have default schemes, said there should be no change to the status quo because it was working well.
"Change introduces more cost, more monitoring, more reporting and, from a consumer perspective, ongoing uncertainty. Ongoing change results in less confidence and trust in the KiwiSaver regime and should be avoided unless needed to fix an identified issue," ASB said.
The discussion document also questioned whether the default schemes should remain conservative portfolios or move to either a lifecycle or target dated form.
Lifecycle schemes automatically place someone in a fund based on their age with younger people in higher risk growth portfolios and older people in less riskier, more conservative portfolios. The scheme then adjusts as a person gets older.
Target dated funds become more conservative over time as they reach the target date - usually retirement.
The government says the default schemes were designed as a low-risk place for people to temporarily park their money while they decided what investment risk to take on.
But there is widespread concern that too many young people are in conservative default funds which could mean they don't grow their investment enough for retirement.
Of the 740,000 KiwiSaver members placed in the default schemes, 60 per cent are still there, half having been in for three years or longer.
A large number of submitters opposed the change from a conservative portfolio, saying the default option should remain focused on capital preservation.