choosing a provider
Q) I am nearly 50 and need to get into Kiwisaver. I feel overwhelmed about choosing a provider. I have no other investments. What are some principles I need to follow in choosing a provider? I am in the moderate category, tending more to conservative than risky.
A) Better late than never I say.
Okay to start, I have to tell you, I'm not an authorised financial advisor. I can only give you some general guidance and information here. On that front, I will say that if you want to seek some professional advice, make sure you get it from a suitably qualified individual as under the new rules only authorised financial advisors can give you "personalised advice." Whilst registered advisors (RAs) can give you general advice on a particular asset class, my experience in dealing with them and also QFEs - qualifying financial entity representatives (for example bank tellers selling KiwiSaver) is that their knowledge of KiwiSaver is pretty basic. It might pay to bite the bullet and pay to get advice from someone who knows this area well.
The Institute of Financial Advisors (IFA) has some tips on how to find an advisor here.
For what it's worth, here's my two cents worth:
With 15 years of employment to go you can still accumulate a fair bit of savings.
I don't know your circumstances but just as an example I plugged in some numbers on Sorted.org.nz KiwiSaver calculator.
Assuming you earn $60,000 a year and contribute 2% of your gross income from now until 65, you can potentially build up a nestegg of $72,040 which would provide you with $93 a week from age 65 to 85.
The inflation adjusted calculator allows you to change your contribution levels, income and life expectancy. Keep in mind that compulsory contributions will rise to 3% of gross income for you and your employer starting next April. I believe Sorted's calculator factors that in along with annual wage growth of 3.5%.
If you were to increase your contributions to 4% of your pay each month you could conceivably end up with approximately $85,000 by 65. At 8% that rises to approximately $135,000 which would provide you with an extra $174 per week. It remains unclear to me what kind of return's Sorted used to arrive at those figures. Fees and performance will impact considerably on how much you end up with. I'll return to that point in a second.
I don't know what your marital situation is so I can't tell you exactly how much that will be on top of the New Zealand Superannuatuation. If you want to see how much you're entitled from NZS (assuming its still there in its present form when you retire) the entitlements are explained on the Work and Income website here.
Covering the two likely possibilities: If you are single and living alone, the amount is currently $697.84 per fortnight. If you're married or living in a defacto relationship, it's $536.80 each per fortnight.
Check out Sorted.org.nz's retirement planner to see how much you'll need for your desired lifestyle in retirement here.
So back to your original question about how to choose a provider and a fund. This is no small job given there are more than 200 funds on the market offered by more than 30 providers. Assuming you have decided that KiwiSaver is the best retirement saving vehicle for you, the biggest mistake you can make it getting overwhelmed by choice and not making one.
If you pick one today and then spend the next year growing your knowledge and find a better option, you can change over. The process is relatively easy. Before you choose one initially, ask what the fee, if any, is to change.
Criteria to select a provider
Everyone will tell you not to get hung up on performance, which is good advice but let's face it, no one wants to get stuck with a dog in KiwiSaver. At the same time, if you're always chasing this year's winner, you'll end up like the proverbial dog -- chasing its tail. One of the key factors to consider when selecting a suitable provider is consistency in returns year after year. That return must also reflect the level of risk you are prepared to take.
Fortunately for you, we have some excellent resources here at interest.co.nz. You can check out the KiwiSaver performance ranking list to see the average per annum returns over three, two and one year. Remember it works backwards, so the one-year result isn't the first year since KiwiSaver was established rather one year back from the latest reporting period. In this instance, June 30, 2012. Note that our results are adjusted for fees but not for tax. So the per annum returns we have compiled reflect that.
Morningstar has some excellent reports for your perusal as well. I recommend you have a look at their data set too although it is similar to our own. You can see their latest quarterly report here. Recently, they have begun rating KiwiSaver providers and funds. If you want to find out more about what their criteria is for rating the funds, I suggest you watch my interview with Chris Douglas, Morningstar's co-head of research on that subject.
In brief, they have a five pillar process upon which they rate the providers. It consists of people, process, performance, parent and price. I suggest you read this document to get a more detailed explanation.
These five principles may be useful for you to bear in mind as you choose a provider. Don't allow yourself to get intimidated by all the technical information.
Obviously you want your KiwiSaver provider to make you money, so check out their performance relative to their peers. Remember you can't compare the results from a conservative fund to a growth fund. Always compare like with like.
Understand the assets that make up your fund and the associated level of risk and whether that's appropriate for your age and circumstances. If you are correct in your self assessment with respect to risk tolerance, you would most likely be looking for a fund in either the conservative, moderate or balanced category. Given your time to retirement you could possibly even consider a fund from the growth category but bear in mind that this would carry a higher degree of risk and the returns could vary considerably from year to year. That said, some of the top performance default and conservative funds have generated some pretty respectable returns rivalling the better performaning growth funds.
For more information of fund types read this.
Does it make sense to you?
If you can't get information from your provider, if they're not communicating it to you in a way you can understand, if you don't know how much you're paying in fees and expenses and they're not up front about it, give them a pass. Obviously it's hard to know this in advance. I would suggest talking to your colleagues, friends and following the financial media to make sense of this.
Fees are another major consideration. Regardless of how your fund does, the fees will keep coming out each year and over time, even the 15 years you'll be investing, will make a difference.
It's not only the annual fee you pay on KiwiSaver. You also pay a range of other expenses including an investment management charge, a proportion of your annual balance deducted each year. The temptation might be to go for the lowest fee charging fund but if the returns are sub-standard, this won't do you much good. You'll need to weigh up the fee and expenses against performance. You'll find that some providers charge a pretty high fee but the returns they've generated arguably compensate for it.
Remember that you can always change providers, as well as funds, so you don't need to worry too much about getting it right from the start. First things first; determine whether KiwiSaver is a good fit for you, do your homework, ask around, think about consulting an advisor and then grow your knowledge slowly over time.
Finally, in case you missed it, here's the top five performing KiwiSaver funds by category based on the most recent data available.
I hope some of this is helpful.