The Menu Shield: Morningstar’s Mind the Gap Proves Retirement-Plan Funds Keep More of Their Returns — and MPF’s Record HK$74.7bn Switching Year Is Tearing It Down

Morningstar’s 2026 edition of Mind the Gap contains a finding buried under the headline number: the investor return gap is not evenly distributed across funds. Simple, stand-alone options that sit on retirement-plan menus — allocation funds, target-date funds — show markedly narrower gaps between what the fund published and what investors actually kept. Strategies picked ad hoc, fund by fund, show far wider ones. As the study’s lead author Jeff Ptak put it: “The less trading that allocators do, the more of their funds’ total returns they’re likely to capture.”

Translate that finding to Hong Kong: the MPF Default Investment Strategy (DIS) is the menu. Some 3.7 million accounts (about 32.9%) sit on it — by choice or by default. But in 2026, MPF members are on track to switch HK$74.7 billion between funds, a five-year high. That is the entire system walking off the menu and dismantling its own shield.

The thesis: the gap is not fate, it is structure

Mind the Gap 2026 covers nearly 23,000 US mutual funds and ETFs over the ten years ended 31 December 2025. The headline numbers: funds earned 9.9% a year in aggregate; the average dollar invested earned only 8.7%. A gap of 1.2 percentage points a year — roughly 12% of total returns left on the table. The US$13.6 trillion invested at the start of 2016 would have grown to nearly US$35 trillion untouched; it reached only US$29.7 trillion. Poorly timed buying and selling explains most of the US$3.8 trillion shortfall.

The distribution is the story:

• US stock fund investors captured 12.8% against 13.3% total return — a gap of just 0.4pp, among the narrowest of the major categories. Boring, diversified, widely held funds are hard to mistime.
• One-stop stand-alone options (allocation, target-date) show similarly narrow gaps: investors contribute on autopilot through retirement plans and rarely tinker.
• International stock ETFs show the widest gap of all at -2.5pp a year. The most volatile fifth of funds show gaps above 2pp; the least volatile fifth, about 0.4pp.
• Index funds (-1.1pp) beat active funds (-1.6pp) — not because indexing is magic, but because index buyers tend to be holders.

Morningstar’s structural explanation deserves to be quoted: investors’ success with simple, stand-alone options hinges on “where and how investors are utilizing such funds — for instance, a brokerage account versus a retirement plan menu.” Stand-alone options “more typically found in the context of a retirement plan do considerably better than other things that are less often found in retirement plans.” Complex strategies (alternatives, sector funds) are less likely to appear on retirement-plan menus and more likely to be used ad hoc — the exact environment where timing errors breed.

Through the numbers: what Hong Kong’s menu looks like

The DIS is the retirement-plan menu inside the MPF system: a Core Accumulation Fund (CAF) plus an Age 65 Plus Fund (A65F), with a statutory fee cap of 0.85% — actual average only about 0.77% (per the MPFA chairman, September 2026). The MPFA 2025-26 annual report: 3.7 million accounts (32.9%) use the DIS, holding HK$169.61 billion — about 11.1% of system assets.

But the account structure reveals uneven coverage: the average DIS account holds only HK$45,841, under 14% of the system per-capita balance of HK$338,950 (MPF Ratings, September final). High-balance members disproportionately avoid the DIS — the “adoption fault line” documented in our 30 September piece. The menu exists; the big money is not on it.

Meanwhile the dismantling is running at full speed. GUM’s Q3 2026 report: fund switching reached about HK$49.8 billion in the first eight months, projecting a full-year HK$74.7 billion — up over 25% year-on-year, a five-year high. Year-to-date, over HK$17 billion flowed into US, Japan and Asia equity funds while Hong Kong equity funds saw net outflows above HK$10 billion. The eMPF platform made switching “a matter of minutes” — zero friction, and the perfect breeding ground for the gap.

BCT’s September programme supplied the on-menu versus off-menu control group: within a single scheme, half-year returns of +32% versus -19% — a spread above 50 percentage points — with members switching funds 110 times in six months. The MPFA chairman warned back in December 2025 that “timing the market easily leads to buying high and selling low.” September’s final numbers (-1.47%, -HK$5,060 per capita, the year’s third monthly loss) are the tuition bill.

The CAF’s own report card needs no defence: about 7.1% annualised since its April 2017 launch, +9.5% over the past 12 months (MPFA interim data, 6 October 2026). Doing nothing beat the mixed-asset fund average of 8.5% (our 16 October piece). The menu’s returns are not the question; the cost of leaving the menu is.

The compounding toll: a thirty-year bill for 1.2 percentage points

Put Morningstar’s 1.2pp behaviour tax into an MPF sandbox (illustrative: HK$5,000 monthly contributions, 7% gross return baseline):

• Zero gap (7.3%, roughly the CAF’s since-launch annualised return): about HK$6.47 million over 30 years;
• Minus the 1.2pp behaviour tax (6.1%): about HK$5.10 million;
• The difference: about HK$1.36 million — roughly 4x the per-capita balance of HK$338,950, or about 14 years of HK$8,000-a-month living expenses.

On a per-capita basis: 1.2% x HK$338,950 ≈ HK$4,067 a year — 88% of the market-average FER of 1.36% (about HK$4,610 a year). The behaviour tax is nearly a second full management fee, and it is entirely avoidable.

At system scale: 1.2% x roughly HK$1.684 trillion in assets ≈ HK$20.2 billion a year. Switching itself is free of charge, but every switch is a decision to rejoin the “ad hoc” cohort — the cohort Morningstar proves has the widest gap.

The fix: hold the menu, write discipline into structure

First, returning to the menu is alpha. The DIS is exactly Morningstar’s three-element formula — simple, stand-alone, on the retirement-plan menu: a statutory 60/40 reference portfolio, automatic rebalancing, a 0.85% fee cap (about 0.77% in practice). The CAF’s 7.1% annualised return beats the vast majority of active choosers (our 28 September piece). Making no selection is itself the selection of the narrowest-gap cohort.

Second, the TVC back door: put voluntary money on the menu too. A TVC account can hold the Core Accumulation Fund directly and is exempt from the statutory de-risking schedule from age 50 (our 13 October piece) — a 100% growth allocation is possible at 65. It is the system’s back door for the disciplined: voluntary contributions follow your discipline, not the legal glide path.

Third, track the MPFA’s “stop and think” nudge. The chairman pledged in December 2025 to add anti-churn prompts inside the eMPF platform — a behavioural intervention aimed precisely at the ad-hoc cohort. As of writing, no such prompt has appeared. In a HK$74.7 billion switching year, members should ask the regulator directly about the guardrail’s progress.

Fourth, a switching discipline checklist (for when a switch is unavoidable): rebalance annually or move via ECA (once per calendar year, quota resets 1 January) — never chase monthly rankings; split large switches into tranches and avoid the 27–28 October FOMC week and the MSCI November review effective week; remember T+1/T+2 forward pricing — every switch is a blind buy and blind sell, and each one walks you further off the menu.

Morningstar proved with ten years and 23,000 funds that the return gap is not the market’s fault — it is structure’s fault, and structure is a choice. Hong Kong’s 3.7 million DIS accounts prove members know how to choose the menu; HK$74.7 billion of switching proves that choosing is not the same as holding. The shield was never in the trustee’s hands. It is in the finger that resists pressing “switch.”