Default risk - nudge edition

Kiwisaver, founded on the premise that people are too quick to stick with defaults, finds that too many people stick with its default plans.

Recall that the whole thing was based on the idea that opt-out plans have more subscribers than opt-in plans: defaults matter. If the default is that you're out unless you actively opt in, fewer people opt-in than would opt-out if you flipped the default around.

And it was set up with pretty conservative fund default options. New workers entering jobs would be default opted into conservative funds - not typically the most recommended option for new workers, although perhaps there's a caveat in New Zealand where some could be using Kiwisaver for a house deposit rather than retirement.

Here's the default fund at Westpac (chosen only because they were the default into which I was set when I started the new job).

Default members (being members who have been allocated by Inland Revenue to the Westpac KiwiSaver Scheme because neither they nor their employer has not chosen a KiwiSaver Scheme) have their contributions invested in the Defensive Fund. The Defensive Fund aims to provide stable returns over the short to medium term with low levels of volatility and investment risk. The Fund invests primarily in income assets but is required by the Instrument of Appointment (under which, the Government appointed us a default KiwiSaver provider) to have an allocation to growth assets of not less than 15% and not more than 25%. Returns will vary and may be low or negative at times. This Fund is suited to investors who have a low risk tolerance or are investing for a short investment timeframe.

NBR chatted with KPMG's head of financial services:

“A lot of people are staying in the default schemes assigned to them when they sign up and, while at least they are in KiwiSaver, it shows they are not thinking too much further about what it means.”

And Morningstar agrees:

Morningstar research manager Elliot Smith says this is a concern, and assigning default members into conservative funds is a major flaw of the system.

“In Australia, most default funds are in the growth or aggressive categories, which is far better aligned with the long time horizon of investing for retirement.”

However, he says some providers are actively trying to get members to determine their appropriate risk profile and switch.

 Treasury's shown that Kiwisaver's not done much to overall savings rates. But if it's affected portfolio choice where too many folks reckon the default must be good enough or the government wouldn't have set it as the default, well, we have to be careful with nudges.