Fund fees and performance of the Mandatory Provident Fund (MPF) Schemes are the major public concerns for the MPF Scheme's 11 years of implementation.
A recent survey on MPF schemes conducted by the Consumer Council reveals that the performance and fees vary substantially even for the same type of funds. Making an informed choice can make a real difference to employee's accrued benefits.
The Council's study shows that for the last 5 years, the annualized return rates of MPF funds in the market have a large variation of up to 20 percentage points between the best and poorest performers, and that the returns of 159 funds are in the red.
Regarding the fund fees, the fees for the same type of funds vary significantly from one to another.
Starting 1 November, 2012, the Employee Choice Arrangement (ECA or MPF semi-portability) will allow employees to transfer their portion of mandatory contributions and investment returns for their current employment held in their employer designated MPF trustee (MPF company) and scheme to another MPF trustee and scheme of their own choice. The Consumer Council, however, reminds employees not to rush to change but to carefully consider their risk tolerance level and investment goal before making a transfer.
The Council's MPF study was conducted during July to mid September this year. The study, covering 523 funds from 39 MPF schemes offered by 15 MPF companies, collected relevant data and made analysis on the scope of services, fund choices, fees and charges, and investment returns of various MPF schemes for consumers' easy reference.
Fund Fees
The study reveals that there are substantial differences in fund fees charged by various MPF companies. The Fund Expense Ratio (FER) of the MPF funds, which reflects the total expenses of those funds, ranges from the highest at 4.62% to the lowest at 0.17%, a 26-time difference.
The level of fees also varies substantially for the same type of funds. Notable difference has been found in the fees of mixed assets funds and equity funds. The FER for mixed assets funds ranges from 0.44% to 4.62%, a near ten-fold difference between the highest and the lowest fees. As for the equity funds, the FER ranges from 0.51% to 2.96%, a 5-time difference.
A consultancy study conducted by an industry group indicates that the average level of FER in Hong Kong is 1.74%. This is much higher than those in 4 countries which have similar retirement schemes in place. Among those countries, the total management fees (i.e. FER) in Chile is the lowest at 0.56% while the relevant fees for UK, Australia and Singapore stand at 1.19%, 1.21% and 1.41% respectively.
According to the Council's study, a 1% fee difference will take out a significant portion from the employee's MPF account and make a substantial difference to the accrued benefits which the employee eventually receives.
Assuming a 5% average gross investment returns for a monthly contribution of HK$2,000 (employer's contribution inclusive) for a period of 30 years, an extra 1% fee (i.e. 2% fee) will significantly reduce the employee's accrued balance by HK$220,000 (16%). An additional 2% (i.e. 3%) will cost an additional reduction of the accrued benefits by HK$400,000!
Fund Performance
The performance of the fund determines the actual payouts employees will receive on their retirement.
Among the 5 major fund types, the performance of equity funds has shown a huge variation. In the case of the annualized returns of the equity funds for the last 5 years, a variation of 20 percentage points is found: the best performing fund has a return rate of 5.67%, and the worst performing has a rate of -14.04%.
As for mixed assets fund, a difference of 8 percentage points is found between the best (3.19%) and the worst (-4.51%) performing funds.
The study also reveals that 159 funds (approximately 45% of 341 comparable funds) recorded negative annualized returns for the last 5 years.
In addition, the Council finds that there is no direct correlation between the fund fee and the fund performance. The high fees may not necessarily translate into high returns.
According to the Council's study, even within the same type of funds, when comparing the average FER and the average 5-year annualized return, 109 funds (about 30% of the comparable funds) are found to charge above the average but delivered below average returns.
Time for Fund
Under the ECA which will be launched next month, employees will only be allowed to transfer their own mandatory contributions and investment returns. The transfer can only be made on a lump-sum basis once every calendar year. They have to apply for another transfer in the following calendar year for their new contributions in their MPF accounts at the original trustee chosen by the employers to the new trustee. The transfer process takes about 6 to 8 weeks.
Before making decision for a transfer, employees have to take heed of the situation that there will be an interim period of time during which their accrued benefits will not be invested in any fund. During that period, there is a possibility of a "sell low, buy high" scenario if the market fluctuates.
On the implementation of ECA, the Consumer Council proposes the following recommendations:
- Mandatory Provident Fund Schemes Authority (MPFA) should merge and expand their e-platforms on fee comparison and the trustee service comparison into a one-stop information platform, so that employees can make comparisons and enquiries of the fund fees and performance data more easily.
- In anticipation of more MPF sales and marketing activities with the commencement of the ECA, the control of the sales of the MPF products by MPF intermediaries should be tightened. On the other hand the industry should exercise their professional advice and service to their customers to assist them in choosing an appropriate MPF product which suit their individual needs.
- Since the MPF System has been in place for more than a decade, fund assets are proliferating rapidly, administrative expenses are in fact decreasing due to the use of information technology, with ECA further enhancing market competition, the Consumer Council is of the view that there is room for reduction in fund fees. Moreover, the efficiency and transparency of switching the MPF benefits should be improved to reduce employees' investment risks during the transfer of funds and that processing time for benefits transfers should be shortened.
- The Council also urges the MPFA to consider providing more flexibility for employees to transfer their accrued benefits, such as waiving the requirement for employees to go through the transfer procedure for their new contributions every year, when it reviews the ECA in future. In the long run, the MPFA should work out a time table and the relevant provisions for the implementation of full portability arrangement for the MPF.
Detailed information and comparison of 523 MPF funds in a comprehensive tabulation format (in Chinese only), have been uploaded to the Council's official website. The information is also printed on a separate spreadsheet which is attached and distributed free with this current October issue (No. 432) of CHOICE.
In addition, a MPF fund comparison worksheet ( PDF / WinWord ) (in Chinese only) is also available on the Council's website to facilitate consumers to perform fund comparison.
The Consumer Council reserves all its right (including copyright) in respect of CHOICE magazine and Online CHOICE (https://echoice.consumer.org.hk/).