They are randomly allocated to one of nine default funds if they do not make a choice themselves. Those funds are provided by ANZ, AMP, ASB, BNZ, Westpac, Kiwiwealth, Fisher Funds, Mercer and Booster.
The funds are conservatively invested and were only ever designed to be a holding place until people decided where to invest.
But many have stayed put, raising concerns that the lower returns associated with conservative funds will mean people don't have as much as they need when they retire.
Rob Everett, chief executive of the FMA, was concerned the results were worse this year.
"We understand that engaging with default members can be difficult. But the lack of progress in this area by the default schemes is disappointing. Especially when the income from fees paid by default members has increased to $31.5 million, and providers still seem to have little trouble engaging other providers' members to get them to transfer."
The research released as part of the FMA's annual KiwiSaver report showed about 173,000 people switched providers in the past year.
Default providers are under pressure to provide financial literacy for members after it was introduced as a condition of being appointed in 2014. Breaches can lead to termination or suspension of their default status by the Minister of Commerce.
Everett said that at this stage the FMA did not think it was appropriate to use its powers under the KiwiSaver Act to require remedial action from providers.
"But, we do think it is clear that default providers need to do more."
He said the FMA had written to the chief executives of the nine asking for a commitment to meet their obligations to their default members and an explanation from those where numbers fell.
"At the very least, we expect them to deliver on what they said they would do in their tenders to the Government seeking default status.
"Or, if they have tried that and it didn't work, to try something more effective."
Total KiwiSaver assets rose $7 billion in the year ended March 31 to more than $40b, or about 15 per cent of New Zealand's GDP.
The growth in new people joining continued to slow, falling to 4.4 per cent in the year to March 31, from 4.8 per cent in 2016 and 8.3 in 2015.
But fees rose significantly on the back of an increase in funds under management and strong investment performance.
Investment management fees were up 21.3 per cent to $266.3m and admin fees rose 5.9 per cent to $82.4m, pushing up the average cost per member.
As a percentage of investment returns, investment management fees dropped from 16.87 per cent to 9.84 per cent, with 2017 the second-best year in the past 10 for investment returns for KiwiSaver after 2015.
Everett said that as membership grew the FMA expected the average cost per member to fall, unless overall costs rose.
The report showed KiwiSaver members took $1.4b out of the scheme. The largest chunk went to retirees at $631m while first-home buyers took out $614m. A further $81m was taken out for hardship reasons, while $28m was withdrawn by those who permanently left the country.
• KiwiSaver now worth over $40b equivalent to 15 per cent GDP
• average management fee was $97.80, average admin fee was $30.30
•153,000 new people joined KiwiSaver in the year to March 31, 2017
• 173,000 people switched funds
• average balance just under $15k
