The government is revamping KiwiSaver rules to ban investing in fossil fuels and illegal weapons, and improve investment returns.
New contracts for default providers from July 2021 will also require new savers to be put into balanced funds unless they opt otherwise.
Commerce Minister Kris Faafoi said banning investment in fossil fuel companies would help combat climate change and carbon emissions.
"It also makes sense for the funds themselves given that there is a risk of investing in stranded assets as the world moves to reduce emissions."
He said the Superannuation Fund quit such investments more than two years ago and its investment returns had not suffered.
The default funds will also be banned from investing in companies making land mines, cluster bombs, and other illegal weapons.
KiwiSaver default funds are allocated to people who do not make a choice when they join the retirement savings scheme.
There are currently nine providers, including the four big banks, and their licences expire in 2021.
New savers who do not make a choice will automatically be put in a balanced fund, which has a higher level of risk but over the long term should deliver higher returns.
Currently the default funds are the low risk-low yielding conservative funds.
Finance Minister Grant Robertson said: "The change is intended to make a real difference to people's financial wellbeing in retirement".
He said default providers would also be pressured to keep a cap on their management fees to ensure they do not eat into returns.
Retirement Commissioner Jane Wrightson supports the changes and said a recent survey shows about 74 percent of KiwiSaver members are interested in ethical investment.
When it comes to fossil fuels, 41 percent of respondents want them excluded from their fund.
Investment companies would also be required to engage and advise savers on making informed investment decisions.