A financial advice firm wants the KiwiSaver Default Fund scheme done away with, saying people should instead be given financial advice to choose a fund for themselves at the time of sign up.
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National Capital director Clive Fernandes said default fund providers were not making the effort to educate customers after they had been automatically placed in a fund.
He said about 715,000 people remained in default funds, with 430,000 of them not actively choosing to stay there.
"The best way to fix the problem is to make sure people don't go into default funds in the first place. Give them advice at the time they are signing up ... at the time when they are most likely to be engaged with their KiwiSaver."
At the time of sign up a person is placed into one of nine low-risk default funds, but could change at any time.
Fernandes said this was a good idea when the goal was to onboard millions of New Zealanders into KiwiSaver quickly, but it was not needed anymore.
He said even if people were in the right fund, many did not understand how KiwiSaver worked and it was the education aspect that was lacking.
"If people don't know where they are and why they are invested in that, as soon as their accounts start falling due to volatility they're going to do the same thing Kiwis did recently - they're going to panic and make bad decisions."
However a KiwiSaver default fund provider said scrapping default funds may mean disengaged investors missed out all together.
KiwiWealth KiwiSaver head of product Melissa Vasta said if some people were not put into a fund, they might never choose one.
"You can't force people to take advice, and that's where the benefit of the default scheme really comes in ... it doesn't leave people behind who aren't at that stage yet.
"Some young people just don't want to engage, they're just not at that stage yet. First home makes that a little bit better but even that's out of reach for a lot of people."
She said once people had some funds in their KiwiSaver, they were more likely to engage and it was better to have them in a default fund than not in KiwiSaver at all.
Data from the fund research firm Morningstar showed the value of KiwiSaver investments fell by $4.5 billion in the March quarter and more than $1 billion was moved hastily out of growth funds into conservative funds - locking in the losses for many investors.
Fernandes said generally new sign ups would be younger people getting their first job, who would be happy with free digital advice.
