KiwiSavers need to stop treading water
An incredible 446,534 New Zealanders have financially marooned their retirement.
That's an alarming number and you might be one of them without knowing. How did it happen?
They jumped aboard the KiwiSaver boat and fell asleep. Next minute they were washed up on one of nine sparse islands called "default funds".
Trouble is, it wasn't a bad place. Food and water drifted by and life could continue. They went to work each day and a tour operator called a "fund manager" agreed to look after them for a fairly low fee.
It was supposed to be a temporary holiday, but hundreds of thousands of people forgot to make plans to move to lusher more age-appropriate islands. The nine islands got more and more crowded. The largest is called AMP and now contains 118,000 castaways.
The isle of ASB has 92,000. Some live in smaller populations of 17,000 on the isles of BNZ and Westpac. Many castaways just won't communicate with the outside world and aren't aware they're harming their long-term future.
THE RESCUE MISSION
The Coastguard, otherwise known as the Financial Markets Authority (FMA) is storming about like a grumpy parent, demanding each operator rescue the castaways. Part of their original contract compelled them to engage in ongoing communication and swim education, in return for the government filling their default camps with free customers.
Like any grumpy parent, the FMA is pointing out a few annoying facts and choosing to ignore the social context. Some KiwiSavers have been partying too hard, island-hopping several times a year (this isn't wise).
They're attracted by the prospect of bigger coconuts in retirement, or they've seen the size of last year's Mojitos. The FMA assume if fund managers can make these people swim so easily, they can do it for the castaways too and should try harder.
But the issues are not the same. Competition must thrive and normal KiwiSavers must be allowed to hop islands. Communicating with motivated travellers who want a great retirement is easy. Convincing the bored castaways to apply for their first passport is entirely different.
Fund managers are scratching their heads. Individual rescues are costly and time consuming. Leaflets flutter down on castaways' heads with written swim lessons. They're tinkering with font sizes and new headlines, which shout, "swim" loudly. Stories are told about social norms on the isles of "balanced fund" and "growth fund", where over a million others reside.
Fees of $31 million a year are raked in by fund managers running the nine islands. Yet that's only $70 a year per person, to provide services as well as encourage castaways to make an active choice to stay or go.
Direct mail and call centres have huge costs and limited effectiveness with the lethargic castaways.
GRUMPY OFFICIALS
So what are the big-wigs doing about this mass stranding? At the moment they're writing tetchy letters to each other. The Minister of Commerce and Consumer Affairs posted an annual letter to the boss at the FMA-Coastguard and said the rescue of these poor souls was to be a "strong focus" in 2017/18.
The FMA in turn posted a letter to the fund manager running each island, demanding they "do something more effective".
The Coastguard wields a lot of power, but these aren't practical in the current framework. They can require a tour operator to take remedial action under the contract. But there aren't any quantifiable performance targets.
The Coastguard can shut down an island, but that only directs new castaways to the other eight. They can replace a tour operator with another, hoping they'll do a better job. Fat chance, without a change to the framework and they know it. This is why their latest report says they're not choosing to exercise their power yet.
So the system is a bit broke. We either battle on with small incremental progress in a broken system, or we implement legal change to alter behaviour and help those in default funds make an active decision about their fund choice. Five changes that would help immensely are:
1. Change the name of default funds to temporary funds. Current language is meaningless and doesn't emphasise their purpose.
2. For new KiwiSaver accounts, government contributions don't begin until an investor has actively selected a fund. Money creates compulsion.
3. Allow no more than two years in a default fund at which point managers can switch customers into a similar conservative fund and drop the default status.
4. Prescribe the number of times a fund manager must write to and phone an investor during the first two years. Given the cost of acquiring the customer is zero and the KiwiSaver market is well-developed, fairly high service levels can be demanded.
5. Prescribe that Inland Revenue will inform employers of staff who have not made an active fund choice. Employers must alert employees quarterly during the first two years.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.