KiwiSaver: When default is not best option

QI heard a report on the news that KiwiSaver investors could be missing out on as much as $72,000 over their lifetimes because they are in default conservative schemes. I'm in the default Mercer Conservative scheme. I'm 26 years old and my fund value is around $12,000. Do I need to be worried about this?

A.It is generally accepted that growth assets such as shares will outperform lower risk assets such as bonds over longer periods of time.

Younger people have a longer time span to retirement so they are encouraged to invest in growth funds - with a higher percentage of shares - and aim for a higher return over their longer investment lifetime.

Conservative funds have fewer shares and more bonds and other lower risk assets, so the value should not fluctuate as much but overall the return may be lower.

This is suitable for people nearing retirement, or younger people who wish to withdraw funds for their first home.

The KiwiSaver Scheme has now been running for 4 years.

According to the Mercer website, their Conservative Fund has averaged 3.28 per cent per annum (after tax at 17.5 per cent) over this period.

You may feel a bit disappointed by this modest return. Don't be. If you had selected the Mercer High Growth Fund (as a fund possibly more appropriate to your age and risk profile) your savings would have averaged -4.90 per cent per annum.

Instead of $12,000 you would have about $10,300 now.

The Mercer High Growth Fund is typical of many growth and aggressive funds which have delivered negative returns for investors over the past four years. The reason for the poor performance of growth funds is the global financial crisis and ongoing sharemarket volatility with concerns around high debt in Europe and the USA.

Will conservative funds continue to outperform growth funds?

Only if we have a prolonged recession. Markets are inclined to anticipate a recovery before it occurs, and investors often miss out on the strongest upturns.

The report you refer to may have alarmed you, but relax.

At this stage investor balances in KiwiSaver are still modest, so a variation of 5 per cent or even 10 per cent either way is not going to make a big difference.

However, when balances get larger it will be a different story.

Sometime over the next few years, all KiwiSaver investors - and not just those in default conservative funds - should take the time to review their KiwiSaver scheme with an authorised financial adviser.

While returns from conservative funds may not vary significantly from one another, it is a different story with growth funds.

Here the manager's tactical decisions and strategies can have a big impact on overall return. Returns over the 3 years to 30 September 2011 varied from 9.5 per cent per annum for the best performing aggressive fund to -5.3 per cent per annum for the worst (source www.interest.co.nz).

Extrapolate that out over 20 years and the numbers start to look scary.

So do your homework before deciding which fund to invest in.

It's a bit like buying a car - you wouldn't walk into the car yard and choose a car just on the basis of colour.

You need to get under the bonnet and find out as much as possible about the car as you can.

Otherwise you could drive away with a bongo van rather than a BMW.

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 8703838. The information contained in this article is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.