Employee Choice Arrangement: having the choice is a right — knowing how to choose is a responsibility

The amendment bill for the MPF “semi-portable” arrangement is about to go before the Legislative Council, with implementation expected in the second half of 2012. For contributing employees, what does the Employee Choice Arrangement really mean? Start with three simple questions: have you ever consolidated your preserved accounts? Do you review your MPF account at least once a year? Do you know what investment mix suits you?

What is the Employee Choice Arrangement?

The Employee Choice Arrangement — the “semi-portable” MPF reform — lets scheme members transfer the accrued benefits from their mandatory employee contributions to a scheme of their choice once a year. With 19 trustees, 42 MPF schemes and 438 constituent funds in Hong Kong, members no longer have to follow their employer’s default pick — but if you have always ignored your MPF, more choice alone will not deliver a better retirement.

In other words, the arrangement hands workers a new right, and with it a new responsibility. Freedom to choose does not make you a good chooser; whether your MPF meets your retirement goals ultimately depends on whether you take the first step.

Three steps to managing your MPF actively

To get the most out of the arrangement, the “set and forget” habit has to go:

1. Review your MPF account at least once a year. Start managing your MPF actively now, and learn how your funds are performing. Use the window before implementation to check whether your current MPF performance is on track for your retirement goals.
2. Weigh fees against performance — performance matters more. If you plan to move your employee contributions, research each provider’s background, scheme options, service quality and fund managers’ track records. Funds in the same category can perform very differently across providers.
3. Consolidate your preserved accounts. When transferring your employee contributions, consider merging all preserved accounts so new and old contributions are managed in one place — fewer accounts to juggle, and no forgotten balances eroding your retirement pot.

The numbers: performance gaps dwarf fee gaps

Morningstar Asia data shows that mixed-asset funds (excluding target-date funds) returned anywhere from negative 18.49% to positive 1.54% from the start of 2011 to September, after management fees — a spread of over 20 percentage points. Pick the wrong fund and no fee saving can make up the loss.

As for the idea that keeping several accounts diversifies risk — that is a misconception. Diversification means investing across asset classes; if different accounts hold the same asset class, spreading accounts does not spread risk.

For guidance on consolidating accounts, see the MPF education hub.