Why most NZers are in the wrong KiwiSaver fund.

The default-fund problem

When KiwiSaver launched in 2007, new members who didn't actively choose a fund were placed in a 'default fund', which was typically a conservative-mix portfolio: heavy on cash and fixed income, light on shares. The logic was risk minimisation; the regulator didn't want first-time investors taking large losses in a market crash and abandoning the scheme.

That was a sensible rule for the first year of membership. It was less sensible for the next 18. From 2021, the Government changed the default-fund rules to put new auto-enrolees into balanced funds, which is closer to right (FMA KiwiSaver guidance). But the millions of members who were auto-enrolled before that, into conservative funds, in many cases haven't moved.

FMA-published industry data has consistently shown that roughly a third of KiwiSaver members sit in conservative or default funds, and for most of them, that's the wrong choice given their age and time horizon.

What the fund types actually mean

Most KiwiSaver providers offer a spectrum of fund types. The labels vary slightly by provider, but the substance is:

• Defensive / cash: mostly cash and short-term deposits. Very low risk, very low return. Long-run average return roughly inflation plus 1%.
• Conservative: 70-85% income assets (cash, bonds), 15-30% growth assets (shares). Long-run average return roughly 4% to 6%.
• Balanced: roughly 50/50 income and growth. Long-run average roughly 6% to 7%.
• Growth: 70-85% growth (mostly shares), 15-30% income. Long-run average roughly 7% to 9%, with materially more volatility.
• Aggressive: 85%+ growth. Same direction, more so.

These are nominal returns net of fees and taxes (at the PIR, the prescribed investor rate). The numbers are long-run averages; actual annual returns can swing widely either way.

The compound cost of being in the wrong fund

An example, with round numbers to keep the maths visible.

A 30-year-old earning $70,000 with employer contributions, KiwiSaver balance $20,000, retiring at 65. We'll model two paths: conservative fund at 5% net annual return, growth fund at 7.5% net annual return.

• Conservative path: 35 years of contributions plus compounding lands roughly $390,000 at 65.
• Growth path: same contributions, same time, compounding at 7.5%. Lands roughly $620,000 at 65.

That's a $230,000 gap. Same person, same income, same contributions. The only difference is the fund the contributions went into.

Two-and-a-half percent a year doesn't sound like much. Over 30 to 40 years of compounding, it is the difference between two distinctly different retirements.

When conservative is actually the right answer

This is the part of the conversation most "switch to growth" articles miss. There are three situations where a conservative fund is genuinely right:

1. You're going to withdraw within 5 years for a first home. Growth-fund volatility within that window can chew up your deposit if you're unlucky. Conservative or balanced preserves capital for known short-term withdrawal.
2. You're within 5 years of retirement and the balance is most of your retirement. A 30% market drop in your final working year can delay retirement by several years. De-risking the closer you get is sensible. (This is exactly when most balanced-fund retirees should be sliding toward conservative, not the opposite.)
3. You can't sleep at night during market drops. Behavioural reality matters. If you're going to panic-sell at the bottom of a 30% drawdown, the conservative fund is genuinely better for you than the growth fund. You only get the long-run return if you stay invested through the cycles.

How to check what fund you're in

Three minutes:

1. Log into your KiwiSaver provider's website. If you don't know who your provider is, log into MyIR through the IRD website; it tells you.
2. Look at your fund. The page should say something like 'Conservative Fund' or 'Growth Fund' under your balance.
3. Compare against your age and time horizon. Sorted.org.nz has a useful KiwiSaver Fund Finder that suggests a fund mix based on your details.

How to switch funds

Most providers let you switch online in 10 minutes. Some require a phone call or signed form, but those are increasingly rare. The switch is free, no tax is triggered, no penalty applies. Your balance moves into the new fund within a few business days at the current unit price.

You can also switch providers entirely, not just funds. Switching providers takes 4 to 8 weeks and again is free and tax-neutral. If your current provider's growth fund has consistently underperformed peers, switching providers can add another 0.3% to 0.5% a year of return, which compounds the same way the fund choice does.

What we do for KiwiSaver clients

For most working-age clients, we look at three things in the KiwiSaver review:

1. Fund type: are you in the right risk band for your age and goals?
2. Provider: is your provider's growth (or balanced) fund delivering peer-comparable returns net of fees?
3. Contribution rate: are you on 3%, 4%, 6%, 8% or 10%? For most working-age clients, 6% to 8% combined with employer contributions builds materially better outcomes than the 3% default.

The conversation takes 30 minutes. The decision usually adds tens of thousands to the projected balance at 65. Most clients leave it set-and-forget after that.