How to choose a KiwiSaver fund
There are lots of criteria we could use when selecting a KiwiSaver fund, such as a familiar brand or the convenience of our local bank. We might even hear of a high-performing fund over drinks or around the barbecue with friends this Saturday.
But is that what we should base our decision on?
Sorted – which gives an independent view of the entire KiwiSaver market – has the top four criteria to use when choosing. In this order of importance, we recommend picking a KiwiSaver fund that:
- Has the right level of risk for us
- Charges fees that we find reasonable
- Comes with good service and communications
- Has performed consistently well (although that’s no guarantee it will continue to do so in the future)
Sorted groups close to 200 KiwiSaver funds into five types: defensive, conservative, balanced, growth and aggressive. This makes it easier to compare similar groups of, say, 30 funds instead of all 200 at once. We want to be sure we’re not comparing apples with pineapples!
Names like “aggressive” are not about who we are or how we’re feeling – these groupings describe the kinds of investments each fund holds. Each fund type contains a certain proportion of growth assets (shares or commercial property) and income assets (bonds or cash). The thing to know is that growth and income assets tend to perform differently over time, and the mix of these kinds of investments will determine what kind of results we get. So it’s good to get the right mix for our situation.
Why fees count
After we’ve worked out what type of funds to compare, it’s worth looking at the fees we’ll be charged by our KiwiSaver providers. Over someone’s entire KiwiSaver experience, we’re talking about tens of thousands of dollars here, so this is valuable to look at. (Sorted’s fees calculator can estimate how much we’ll pay.)
Fees eat into whatever returns we’ll earn through our fund. So the more we’re paying in fees, the lower our returns. This is one instance where we don’t necessarily get what we pay for!
That said, if our fund manager is able to do their job well and improve the fund’s performance, it may be worth paying for. In that case we’d pay more, but we’d be getting more back.
But here’s the thing: we cannot tell the future, or how a fund will perform. (See more on performance below.) So the criteria we can base our decision on is whether the fees we’re paying are reasonable. Here’s more on why it literally pays to look at fees.
What’s service about?
After a fund’s risk level and its fee structure, another sure thing we can know about is the services and communications that come with it. But these would be difficult to compare if we had to call around to all the KiwiSaver providers out there to ask them what’s on offer.
To help, Sorted surveys all the KiwiSaver providers every six months and asks them about their range of services. How much help do they give their members in choosing their fund and managing their accounts? What channels do they use to communicate? What extra help do they offer?
Sorted’s services percentage, which is based on the survey responses, essentially shows how many services they offer, not necessarily whether they do a good job of it. Sorted can’t tell us whether a provider has a well-run call centre, but it can say if they have one and that it takes our calls in the evenings and on weekends. Overall, the idea is that if a provider has put in the work to set up many services, that says a lot about what we’ll get. Find out more about services.
Finally, after risk level, fees and services, it’s time to look at the numbers that everyone wants to know: how did a fund perform? How much did it earn in returns? How much did my money grow? This is what it’s all about.
The number that counts most is the return after fees and taxes are taken out. These are the net returns. That’s what the KiwiSaver fund finder displays so we can compare easily.
It’s also best to compare returns over the longest timeframe possible. The finder stacks funds based on their five-year return, and by selecting individual fund pages, we can go back even further to whenever the fund began. It’s easy to compare how the fund did against its peers by seeing the average return for that type of fund. Again, no apples and pineapples together.
Since we can’t predict how a fund will do in the future, it’s not a good idea to choose solely on how it has done in the past. (That’s why performance is criteria number four, after all.) Research has shown that looking at performance on its own is not a great way to choose a fund, since often a top performer for one period can get low results in the next. So we can’t just pick the fund that has had the best returns lately.
Here’s as far as Sorted will go: after risk level, fees and services, it’s all about looking for a fund that has not consistently been subpar and constantly underperforming. This would be a sign that the fund has been managed poorly. Here’s more on performance.
Should we switch?
It’s easy to switch funds, but it won’t always be right for us. There are two ways of switching in KiwiSaver: staying with our provider and moving to one of their other funds, or moving to a new provider entirely.
But there definitely are some really bad reasons to switch.
For instance, if the recommendation comes from someone who is rewarded when we switch, like an adviser or bank. We need to make sure to ask questions about this.
Or the reason for switching doesn’t actually improve our KiwiSaver balance. Being able to see our KiwiSaver alongside our savings and loan accounts on the same statement or screen is probably not enough of a reason to make the move.
Or we’ve read or heard that another fund has been bringing in higher returns than ours – especially if they’re just short-term returns. If we’re chasing a rate, we’re basically chasing something that’s already gone.
So let’s keep these four criteria in mind as we look at a KiwiSaver fund. Is it the right level of risk for us? Are its fees reasonable? Does it come with good services? Has it performed consistently well?
That way we’ll find the fund that suits us best.