KiwiSaver - allocation to providers
This is an appendix to:
If employees do not choose their own KiwiSaver provider, and their employer does not have a “chosen” KiwiSaver provider, the employees are randomly allocated to a “default” KiwiSaver provider. The random allocation is done by the IRD. Within the default provider, they then get initially allocated to the legislated default investment option. Having failed to choose a scheme, the randomly allocated employee is most likely to have not chosen an investment strategy.
Being randomly allocated to a default provider and then allocated to the default investment option, is probably not a sensible option, and is unlikely to be the optimal savings solution for most KiwiSaver members. Such savers are likely to end up with lower returns on average and will still experience negative returns from time to time. The lower average returns will quickly discount the value of the $1,000 sweetener and the tax credits. Because the allocation of a KiwiSaver provider will be random and the decision not “owned” by the employee, there may also be a higher incidence of “lost” account holders.
From an employer’s perspective, there are three solutions to this problem:
|Do nothing||It is, after all, the employee’s own doing by not making a decision. The employer could say it should not get involved and has no responsibility to ensure that an employee saves sensibly for retirement. Also, what is “sensibly”?
|Select a chosen provider||This has the advantage that the provider, if well selected, will be competitive and the default investment option of the chosen provider can be better aligned to the average employee’s needs. Also, a chosen provider does not stop employees selecting their own provider or own investment option, within the employer’s chosen provider.
|Educate employees and motivate them to take action||The best outcome from an employer’s perspective will be achieved if employees consciously decide what is best for them. Many employees will need help with this decision. Facilitating education and getting the employees help to choose an investment option, should be one of the advantages obtained by the employer selecting a chosen provider. However, an employer can organise the availability of education separately. KiwiSaver does not need to be the reason.
Even the “do nothing” option will have implications for the employer. As a minimum, the employer will probably want to ensure that employees understand that, if they do not make a decision, their savings will end up in a default option.
The best option is likely to be where the employer selects a chosen provider and organises the chosen provider to help each employee make individual decisions.
Selecting a chosen provider that provides the full range of options, that manages manager risks and has low fees will not compromise the employer when the markets turn down. Being seen to help should produce HR returns that exceed the financial cost.