Navigating KiwiSaver Episode 2: KiwiSaver Funds

In this episode, Jess asks Stuart to break down the different types of KiwiSaver funds.

Funds are grouped by how much of the riskier investments they hold, like shares and property (also known as "growth assets"). Whether you're looking to dial your risk up or down, it's important to pick the right fund that aligns with your savings goals. 

Stuart also shares where to find out exactly which KiwiSaver fund you’re in — because knowing your current fund is the first step to making sure it’s working for you.

This podcast has been prepared by the FMA. The advice is of a general nature, and is not intended to be financial advice and FMA does not accept responsibility for any loss that any a person may suffer from following it. The FMA recommends that our audience seek their own financial advice in respect of investing in KiwiSaver. Anyone considering investing in KiwiSaver or making changes to their investment in KiwiSaver should seek advice from a financial adviser.

Transcript

Jess 

Kia ora, welcome. My name is Jess. I'm in the external communications team here at the FMA. I'm joined with Stuart, our Chief Economist. And today we're going to talk a little bit about KiwiSaver funds. So to kick us off, I don't actually know what that means? So what is a KiwiSaver fund?

Stuart

Ohh it's a great question. Alright, KiwiSaver funds one of the challenges of financial services is all of the terminology and it can be really challenging. A fund is something that your money is placed into that's invested somewhere. So let's try and break that down. It's a big pile of money. And that money is invested into ideally lots of different places, so some shares, some bonds, maybe some treasuries. They're bonds from the central government, basically, maybe some property. So you're currently putting 3% in?

Jess
 
 Yea
 
 Stuart
 
 And that money is going into something called a fund, and I'm putting some money into my KiwiSaver, and that money's going in. Let's pretend that it's going into the same fund. Lots of different people right across New Zealand are contributing money into that fund. And then there's an individual called the fund manager who invests the money to get a return. And so all the fund is, is this basically big pile of money that's invested, by a fund manager to deliver a return to all the people who have contributed money through their KiwiSaver, into that fund.

Jess 

All I heard was big pile of money. That sounds great.

Stuart

Big pile of money. Yes. Alright. Well, a little bit of that big pile of money are your contributions.

Jess 

Yeah.

Stuart

Does that make sense?

Jess 

It does. You mentioned at the start. Let's assume that we're in the same fund. So I'm guessing that means there are different funds?

Stuart

There are different funds, so the second most important choice you're going to make with your KiwiSaver after you've decided how much you're going to contribute is which fund you're going to put your money into and that's really what we're talking about today. How do you choose the fund that you're going to put your money into?

Jess 

OK. Let's chat a little bit about what the different funds are, and I'm gonna ask you to tell me which one I should be in, alright.

Stuart

So which one you should be in is again a pretty challenging question, but let's talk about the funds that are available. So in New Zealand, there are currently 31 KiwiSaver providers. Now your next question is probably what to provider and that's our company or a firm that manages one or more of these funds.

Jess 

OK.

Stuart

So, most KiwiSaver providers will offer a couple of different funds alright. The first one will be called a conservative fund and that's just as the name suggests, it's a fund where the fund manager or the investment manager same person. Is looking to make quite conservative investments. So we would expect that fund to grow overtime. And we would expect it to grow reasonably slowly, but be quite safe, ok. Conservative sort of as the name suggests. At the other end of the scale, most KiwiSaver providers will also offer a growth fund, and this is a fund that we're hoping will grow a bit more or a bit faster bit more quickly. But it might have a higher amount of risk. Now, what does risk mean in this context? It basically means volatility. So probably what does volatility mean? Is that the next question, yeah, for sure, OK, volatility is like the amount it bounces around.

Jess 

OK. OK.

Stuart

So let's think of a stock on the stock market, right? One day it's $5, the next day it's $5.10. The next day, it's $4.50. The day after that, it's $6. It's bouncing around. It's volatile. Did you get a cup of coffee on your way to work today? How much was it?

Jess 

I don't wanna say, haha it was $7.00.

Stuart

$7.00.

Jess 

Oat milk these days. I know a dollar for oat milk anyway.

Stuart
 
 You're drinking some fancy coffees.

Jess 

Coffee is expensive though.

Stuart

How much was it yesterday?

Jess 

I usually get the same thing, so it's the same. Yeah. I don't change much.

Stuart

The same everyday, so it's not volatile is the point I’m making so it's a bit more like  a conservative fund.

Jess 

OK, now you're talking my language. Alright, coffee.

Stuart

Coffee. Right? So at one end, we've got the conservative fund. We expect it to grow slowly, but not be very volatile. And at the other end of the scale, we've got the Growth fund. We expect it to grow faster, but it's going to be more volatile along the way. It's going to bounce around like the price of the share, not like the price of the cup.

Jess 

OK. Coffee. Gotcha. So lastly.

Stuart

Sorry, Jess. There's one more. There's one more.

Jess 

I've got a burning question. No talk about the last one.

Stuart

The last one is in the middle. It's a balanced fund and as the name suggests, it's about halfway between the Conservative fund.

Jess 

Ah.

Stuart

And the growth fund.

Jess 

So its less risky?

Stuart

It's less risky than the Growth Fund, but more risky than the Conservative fund. Now they're the three main types you will hear. You might hear some other terminology. Sometimes providers, they offer an aggressive fund, and that's more aggressive than a growth fund, so even more expectation of long term growth, but even more expectation of volatility. Now you had a burning question?

Jess 

So last week we talked about contributions and how there's a default contribution. I'm just gonna assume that there's a default fund, that you land in as well? Is that the less risky option is that the default?

Stuart

It used to be. It's an interesting question. So it used to be the case that if somebody didn't make a fund choice, they would get put into that conservative fund, a lower expectation of growth and lower risk. But recently that's changed and default scheme members are placed in a balanced fund. And let me explain why that is. If you're a very long way from retirement, bit like yourself. Those pieces of volatility, they don't really matter as much because you can't take the money out unless you take it out for a house deposit. Yeah, but you can't take it out until you retire in 40 years. So if the thing bounces around from one day to the next, it doesn't really matter to you what would be better would be if you had a little bit better expectations of the growth of the fund. Think about it from your perspective. It doesn't matter how it moves today, but you'd like a bigger number when you do ultimately get to retirement. So that's why it was changed from a conservative fund into the balanced fund to take account of the fact that, many people don't need to worry about the day-to-day movements of the markets, but it would be better if their retirement savings grew more in the long term.

Jess 

So Stuart, you talked about conservative, balanced and growth funds. I'm not a very risky person. Just to tell you so, which should I go for? It makes me nervous to go with the most risky option. So what should I do?

Stuart

So what should you do? The fact that you've brought up risk is really important. If you were to go to a financial advisor, they would ask you about your risk tolerance and they would ask you some questions about how you feel about risk. And that would be to try and understand something called your risk appetite. And then you would base your fund choice between conservative balanced or growth on how you feel about risk or your attitude towards risk. Now that's certainly one thing that you can do. Mm-hmm. And that will help you make a choice between those three options. It's a really important thing to do for somebody in their 50s, somebody in their 60s who's quite close to retirement. For you in your 20s, I would encourage you to think about the idea of growth being more important than current volatility. So I would encourage people in their 20s to be more towards the growth end of the scale than the conservative end of the scale. So that would mean being maybe in a growth fund or if you feel that you're a particularly risk averse person being in a balanced fund. But I would be a little bit worried if people in their 20s were in a conservative fund. And actually, that's why the governments changed it so that default members or members who don't make a choice get placed into the balanced fund because it's more suitable for people who are a long way from retirement.

Jess 

OK. I'm just thinking if there's people listening that are like me thinking shoot I'm not sure which one I'm actually in currently. Is this something we can find out? And then also can you change it like your contributions or?

Stuart

Absolutely. Your KiwiSaver provider should be able to tell you what fund you're in. They should be able to give you some information on the fund. Sometimes they'll give you something called a product disclosure document or a PDS.

Jess 

OK, awesome. So people listening who just have no idea what they're in, they can go and find that information out. So, Stuart, if you don't know who your KiwiSaver provider is, how can you find that information out?

Stuart

So if you go through IRD, if you go onto the my IR account, you should be able to see who your KiwiSaver provider is. And then you can reach out to them and they'll be able to give you more information.

Jess 

So Stuart, I feel like we covered quite a lot today and for others listening who might be similar to me, what are the key takeaways that they can get out of this episode?

Stuart

The key take away from this episode is to really look at the fund that you're invested in so. Probably that's going to be either a conservative fund, a balanced fund or a growth fund. And then you want to have a think about whether that fund is suitable for you. It's very difficult in finance to provide rules of thumb, but if you're in your 20s, your 30s or your 40s. I'd much prefer to see you at something that's at the slightly more risky end, something in a growth fund, or if you're a particularly risk averse person, being in a balanced fund would be OK. If you're older than that, if you're in your 50s and your 60s, you really need to focus on your whole financial your whole financial health, and how much money you're putting into your KiwiSaver and your plans for retirement. And it's really not possible to provide rules of thumb other than it's really time to focus on these things. If you're not sure.

Jess 

Awesome. That's really helpful. And where can people go for tools and resources?

Stuart

So there's lots of different tools and resources around. Your KiwiSaver provider should be giving you some information. I would also really encourage you to have a look at the sorted web page. That's really helpful. It's run by the Retirement Commission. And they provide some useful tools, some useful calculators, and some information to help people make decisions about their KiwiSaver.

Jess 

Awesome. Thank you so much for your time again today, Stuart. I will see you next week. Thank you so much for watching. If you'd like to find more information, you can go to our website, www.fma.govt.nz. We will see you next week.