Employee Choice Arrangement: the dos and don’ts before switching

This article is a rewrite of a report from August 2012.

On 1 November 2012 the Employee Choice Arrangement — the “semi-free choice” scheme — took effect, letting workers move accrued benefits from their current employee mandatory contributions to a chosen trustee once a year in one lump sum. A Manulife Hong Kong executive shared the dos and don’ts in a column to help readers plan wisely.

Four things to do

1. Review your needs; pick funds matching your time horizon. Financial needs shift with life stages: if children leave you no time to manage MPF and you lack investment knowledge, a “lazy fund” (target-date fund) may suit you. Providers then offered target years from 2015 to 2045, spaced five or ten years apart — tighter spacing meant more choice.

2. Consolidate your accounts. Hong Kong had over four million preserved accounts — two per person on average, some holding a dozen. Merging accounts scattered across trustees into one made management focused and complete.

3. Compare fees on the MPFA website. Nineteen approved trustees operated citywide. Beyond fund choice, fees and performance, weigh financial strength, track record and service quality. Compare like with like: mixed-asset funds averaged a 1.93% fund expense ratio, with the priciest at 4.62%; actively managed funds generally cost more than index funds.

4. Check whether perks are short-term or lasting. Many trustees dangled promotions to win switchers — verify whether they are one-off or ongoing, and whether benefits scale with asset growth. Never switch for a fleeting perk alone.

Two things not to do

1. Don’t switch on impulse. MPF is a long-term investment; don’t follow the herd into a hasty trustee change.

2. Don’t fixate on short-term swings. Markets had been volatile since the 2008 crisis; moving funds on short-term moves invites unnecessary risk. Remember dollar-cost averaging: over the long run, unit purchase prices “average out”, cushioning volatility and building long-term growth.