Wide variations in fees and charges of MPF funds - CHOICE # 369

Your hard-earned savings of a lifetime which you bank on to live in retirement, are being eroded by the high costs of some MPF funds.

A recent Consumer Council study on MPF schemes covering nearly 300 constituent funds (up to end of June) has revealed that a good sizeable proportion of your investment is deducted by MPF service providers over a host of fees and charges.

The study clearly showed that a mere few percentage points can make a substantial difference to the accrued benefits one eventually receives.

According to the study, a 1% annual fee will reduce 23% of your retirement benefits over 40 years (on assumption of a 5% investment return), or $690,000 less for an accrued balance of $3.05 million. 

In theory, an extra 2% (up from 1% to 3%) annually will take out more than half (52%) of the accrual, or $1.58 million less for the same amount.

In choosing a MPF fund, consumers are advised to compare the FER (Fund Expense Ratio) of their choice of MPF funds with the others in the market.

FER is a standard measure, introduced by the MPFA in their Disclosure Code in 2004, which takes into account the total level of expenses of a fund as a percentage of the fund's average net assets (fund expenses/average net assets x 100%).

These expenses include: manager fees, trustee fees, legal and accounting fees, etc. Often, MPF scheme members are not aware of these expenses as they are deducted from the fund asset before its latest value is reported to the members.

Therefore, be aware of the level of fees; the higher the FER, the bigger the drag on net performance. For instance, for a $100 million fund with a 2% FER for a year, the cost is $2 million.

A wide range of variations in FER were reported in the Council's study ranging from the lowest FER of 0.41% (belonging to an equity fund) to the highest FER of 3.87% (a guaranteed fund). 

Overall, the average asset-weighted FER of all schemes was 2.06% per annum, ranging from 1.61% p.a. to 2.52% p.a.

Of these 35 schemes, 21 (60%) were above the industry average of 2.06% in FER; and 14 (40%) were below the average.

It was also found that for the same fund type, FER could vary significantly from one fund to the other. For example, in the case of balanced fund (a major portion of the MPF investment is in this fund type), the highest FER (2.84%) could be as much as twofold of the lowest (1.38%).

Amongst all fund types, guaranteed fund is comparatively more expensive to hold charging an average FER of 2.53%.

FER as a measure of the expenses of a fund is, however, not without its limitations. 

The study observed that certain fees and charges paid directly or indirectly by MPF scheme members, such as joining and annual fees, contribution charge, offer-and-bid-spread, withdrawal charge, are not included - though most of these fees and charges are currently waived.

Further, a few of the funds were found to have provisions allowing them to impose certain types of fees which warrant the attention of scheme members.

For example, at least two constituent funds imposed a performance fee or incentive fee - to a maximum of 20% of the increase in net asset value of units over an accounting period.

One scheme applies account maintenance fee ($50 per month) when an MPF account has been inactive for a 12-month period and the balance is under the specified set amount. However, this fee is also currently waived.

Other than the general qualifying conditions (e.g. retirement, death or total incapability) to be met for guaranteed return, scheme members should be aware that many guaranteed funds impose specific guarantee conditions such as requiring at least 36-90 month (generally 5 years) "continuous investment" period. 

For scheme members who change jobs or want to switch their accrued balances to other funds, they are advised to note these special conditions and fee items when considering to maintain a preserved account or to switch their account balance to a new MPF scheme or fund.

The Consumer Council is of the view that despite the choice of MPF scheme rests with employers, scheme members should play an active role in expressing their views, and participating in the selection process.

But employers and their employees should not make their investment choices purely by comparing the fee structures of different MPF funds. They should also consider and assess the investment objective and policy, risk profile, track record of the funds, and the expertise of the fund manager before making investment decisions.

Scheme members are urged to do their homework, evaluate the fees by referring to the Council's CHOICE article and MPF fee comparison table (in Chinese) which contains, amongst others, a comprehensive list of fee details (e.g. the current and the maximum levels) of close to 300 constituent funds in the market, and their service providers.