Is it better to have one MPF scheme or multiple preserved accounts? Convoy’s Kenrick Chung Kin Keung outlines the options for you and your clients.
Changing jobs is not an uncommon experience. Since December 2000, every change of job should have brought your client a newborn baby, i.e. an MPF Preserved Account. More and more often advisers are asked to provide their best recommendations how to deal with more than one MPF preserved accounts.
Three ways to handle accrued benefits
The easiest but the laziest way is to advise the client to retain the accrued benefits within the original MPF scheme. You can always advise them to switch to another MPF scheme at a later time.
The second choice would be to transfer those accrued benefits to the MPF scheme of the new employer. This will make it easier for your client to handle the investment for both past and future contributions. However, this will lose the flexibility of switching those accrued benefits from previous employers to another MPF scheme when your client is still working for the new employer. Hence, as a professional MPF adviser, you must remind your client about this point.
The final but most flexible way is to transfer the accrued benefits to an MPF scheme of the client’s own choice based on your advice. In this way the client can always select their most preferred product. The disadvantage is that they have to spend time to evaluate marketing materials and product information of the different MPF service providers. However, details are often overlooked. For example, we have been critical about the high level of fees. In fact, we should also pay attention to the fee collection method. If part of the fee or even the total amount of the fee is collected by deduction of fund units from the MPF account, it can directly erode the amount of units held. Hence, the final retirement income would also be "eaten".
Consolidate or not?
Many people say that we should consolidate our Preserved Accounts because consolidation is easy to manage. At least clients don’t have to remember numbers of different MPF schemes and do not need to search for the "babies" lost on the street from the MPF Authority. Secondly, it should be easier when fund switching at the appropriate time. The client just needs to visit one website or fill in one form to reallocate the MPF investment. Thirdly, there are always promotions from MPF service providers for Preserved Account business. Consolidation can increase the bargaining power for a better offer, e.g. the amount of a bonus unit rebate, because the amount of the accrued benefit is bigger in a single account than if it was dispersed in different accounts.
In fact, there are still some advantages for having more than one Preserved Account.
Choice of types of funds is one of the biggest reasons. You may want to advise your client to safely "park" part of his or her MPF benefits. Hence, you can suggest that he or she puts that amount into an MPF scheme with the "parking fund" which you prefer. Then, you have to thoroughly understand terms and conditions of your selected parking fund. Your clients cannot enjoy the guarantee if they do not meet the specific requirements. Therefore, both understanding the details involved and explaining them clearly to your clients is critical. Otherwise, a guaranteed fund may give them a negative return. For other portions of their MPF benefits, you can choose an MPF product that you find appropriate to your clients』 best interests.
How to choose?
In choosing MPF products, we have to consider different aspects including fund type, performance, type and quality of services, fees and charges, etc.
There have been new types of funds added to the MPF market since December 2000. At the initial launch, we only had the choice of equity, bond, lifestyle, money market, and guaranteed funds as well as the Capital Preservation Fund (now called the MPF Conservative Fund). Nowadays, we have the choice of additional types, such as sector funds, index-tracking funds and target date funds. Choosing an MPF product with a suitable fund type is crucial to your clients because it will affect your recommendation about investment to them. For example, you may suggest to them to invest in a certain region or sector sometime in the future. However, it may turn out that there may be no such type of fund in the MPF product suggested by you. This would be embarrassing and undermine your credibility.
Most of us may have been attracted by fund performance figures but have occasionally ignored the associated risk level. This is very dangerous because different people have different risk tolerance levels. Past performance is already history: there is no guarantee that previous good performance would continue indefinitely. Therefore, we should provide periodic reviews to our clients on their investment especially for the purpose of saving for retirement.
Generally, there is little or no difference in services from different MPF providers. However, we may overlook some seemingly minor issues whose effects could be great in the future. For fund switching, we have to explain to the clients about the frequency allowed, charges for additional switches, modes of fund switching, i.e. balancing or directing, cut-off time and the date of dealing. You have to tell them if the MPF scheme will use the price of the date of your switching or if they will use the price of the next trading day. Apart from this, other types of services can affect the efficiency of MPF fund management, e.g. electronic communications for balance enquiry and service quality.
As mentioned above, the general perception is that fees and charges of MPF products are high. We have been seeing fee deduction announcements from various MPF services providers. In fact, the important point is whether the fees paid are reasonable and justified. Thence, we have to present the whole picture of an MPF product to the client and not just focus on the amount of fees and charges.
It is easier and more efficient to manage a smaller number of Preserved Accounts. If there is an MPF product fulfilling different aspects of your clients』 needs, it is good to consolidate all the MPF Preserved Accounts into one. After the regulator has implemented the Employee Choice Arrangement, the Preserved Account is renamed as a Personal Account. Clients without professional and objective advice may face problems of too many Personal Accounts. If you do not help your clients to take care of their "baby" today, they may have to pay the price in the future. That price in MPF terms could be an inadequate retirement income.
Kenrick Chung Kin Keung, director, MPF Business Development, Convoy Financial Services