MPF fund fees comparison: where does the 1.74% expense ratio go?

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

MPF fees are a perennial complaint — but few realise the charges are not just “the fund manager’s pay”. In April 2012 the MPFA explained the other half of the bill: trustees must perform a stack of statutory administrative duties, and that is what makes MPF fees fundamentally different from retail fund charges.

What is the MPF fund expense ratio?

The fund expense ratio (FER) is a fund’s total expenses as a percentage of its assets. As of April 2012, the average FER across Hong Kong’s MPF funds was 1.74 per cent, down 17 per cent over four years; alongside investment management fees, the ratio covers the cost of trustees’ statutory administrative work — so it cannot be directly compared with retail fund charges.

What administrative work must trustees do?

The MPF is a mandatory retirement scheme with monthly employer and employee contributions. Trustees’ statutory duties include:

1. enrolling employers and employees into schemes
2. collecting contributions and allocating them to members’ accounts for investment
3. helping recover default contributions
4. ensuring regulatory compliance
5. arranging benefit payments

The MPFA estimates most scheme charges go towards exactly this administrative workload — far broader than what retail fund charges cover.

Why can’t fees be compared directly?

Take two passive funds tracking the Hang Seng Index:

The law does not empower the MPFA to set fee levels, but it has pushed reductions: reviewing scheme operations, proposing legislative changes to cut trustees’ operating costs, and encouraging trustees to launch keener-priced schemes and funds. In December 2011 it also appointed consultants to study trustees’ administrative costs and recommend streamlining, with a report expected in mid-2012.

Is there room for MPF management fees to fall further?

Yes — and it was already happening. The 17 per cent fall in the average FER to 1.74 per cent over four years shows fees trending down with trustees’ cooperation; the consultants’ mid-2012 report was expected to find further scope to streamline processes and cut costs. When choosing funds, members can use the fund expense ratio to compare the true investment cost across funds.

Compare charges across MPF funds — the FER is published for every fund.