The Great MPF Ripoff: One Index Fund for the Price of Ten

Hong Kong’s MPF system forces everyone to save for their retirement. It also forces them to pay unnecessary fees to multiple layers of various middlemen who add little, if any, value.

Diagram of the Various MPF “Stakeholders” Who Collect Fees

ETF vs. MPF

If one buys the exchange-traded fund known as the Tracker Fund of Hong Kong (TraHK) directly off the stock exchange, one will only pay 0.1% per year in ongoing fees. It is the cheapest way to invest in the Hang Seng index.

However, if one invests in the Hang Seng index through an MPF scheme, one will pay up to eleven times more than necessary. This is surprising because most MPF schemes do nothing more than take one’s money and put it in the TraHK, something which many people are willing and capable of doing by themselves without any assistance from fee-collecting middlemen.

Below is a chart which lists all of the MPF funds that invest in the Hang Seng index. The cheapest MPF fund costs 0.69% per year. The most expensive fund is 1.08% per year. 

All of the funds invest in exactly the same stocks, so the differences in fees are a reflection of how efficient (or greedy) the scheme providers are.

Chart - MPF Hang Seng Tracker Funds

FER stands for Fund Expense Ratio. The funds at the bottom of the chart are relatively new, so data is not yet available for them. Info in the chart was obtained from MPFA’s Fee Comparative Platform on March 20, 2015.

HSBC has by far the most money invested in its MPF funds (multiples higher than its nearest competitor), which means HSBC should be able to utilize its economies of scale to offer the lowest fees. However, HSBC charges almost 40% more than the lowest-cost competitor. This indicates that HSBC may be managing its schemes poorly, or perhaps gouging its customers.

MPFA Caps Middleman Fees at Nosebleed Levels

Earlier this month, the MPFA announced a number of new reforms to the MPF system which are supposed to take effect in 2016. One of the purposes of the reforms is to bring down MPF fees.

Every MPF scheme provider will be required to introduce a “core fund” that uses a passive investing strategy, meaning that each core fund will operate like an index fund. The total ongoing fees will be capped at 1%, which is ten to twenty-five times more expensive than a good ETF index fund. (In the US, ETF fees are as low as 0.04%.)

The people at MPFA have suggested that a passively managed fund charging 1% per year is “good value”, raising questions about whether or not they are in touch with reality.

Core Fund FER Capped at 1 Percent (Circled)

Screenshot from MPFA’s June 2014 Consultation Paper, page 5

Although the new fee cap of 1% is allegedly intended to help bring down fees, it will in fact exert zero pressure on many scheme providers. The MPFA has published data showing that the average ongoing fees for MPF index funds is 0.98%—already below the new cap.

Average FER for Index Tracking Funds

Screenshot from MPFA’s June 2014 Consultation Paper, page 33

Without Providing a Rational Explanation, HK Government Protects Financial Interests of MPF Middlemen at the Expense of Ordinary Hong Kongers

When the Mandatory Provident Fund Schemes (Amendment) Bill 2014 was being discussed last year, a man named Peter Wong proposed giving Hong Kongers the legal right to invest their MPF contributions directly in fixed-term bank deposits, individual stocks, and the Tracker Fund of Hong Kong (TraHK) without the high-cost “help” of multiple layers of fee-collecting middlemen.

The government rejected Mr. Wong’s proposal, saying that the MPF middlemen were needed to “save scheme members from undue investment risks”.

In the case of TraHK, this claim makes no sense. Hong Kongers face the same investment risks whether or not they purchase TraHK directly or indirectly via a complicated MPF scheme.

The government also claimed that investing in TraHK via MPF middlemen was “more efficient and flexible” because it allowed Hong Kongers to avoid “small-amount transactions so as to lower the cost impact.”

It is true that upfront fees might be relatively high if one were investing only $1,500 HKD at a time (HSBC charges $50 HKD, which is roughly 3.3%), but if one wanted to transfer a year or more of MPF contributions, i.e. tens or hundreds of thousands of HK dollars, the upfront fee would be relatively low, just a small fraction of a percent.

More importantly, even if one paid a high upfront fee, it would still be far less costly than paying high annual fees for decades on end.

Peter Wong’s Proposal and the Government’s Response

Illustration of the Damage Caused by MPF’s High Ongoing Fees

Suppose one works for 40 years (from age 25 to 65) and invests $1,500 per month in an MPF Hang Seng index fund that costs 1% per year. One will be paying 0.9% more than is necessary, since a direct investment in TraHK costs only 0.1%. 

Due to compounding effects, high annual MPF fees will translate into unnecessary losses that are magnified more and more each year.

If the TraHK averages 6% returns per year, by the time one reaches the age of 65, the losses will amount to $490,316. This is nearly half a million dollars that a Hong Konger could and should be getting for his or her retirement.

The chart below summarizes the math:

Illustration of the Impact of High Ongoing MPF Fees

Numbers were calculated using a compound interest calculator on TheCaculatorSite.com

Stephen Vines, for South China Morning Post: “It is arguable that the whole scheme is nothing short of being a scandal.”

Yesterday, South China Morning Post published an article written by Stephen Vines, in which he suggested that the MPF system is “nothing short of being a scandal”.

He noted that fees are abnormally high and returns are abnormally low. He contacted an MPFA official to request an explanation for why investors aren’t being allowed to invest directly in ETF funds, such as TraHK, without paying fees to a smorgasbord of middlemen.

He said, “[I] received a response that left me none the wiser as it consisted of a muddled explanation of structures, difficulties of administration and lots of other bureaucratic stuff.”

Vines concluded, “Hong Kong investors can expect to continue being short changed, while in the rest of the world the enormous revolution in the fund management industry is seemingly unstoppable…MPF investors can only look on with envy.”

How to Complain to the MPFA

Ripped off Hong Kongers who want to keep more of their retirement money can complain to the MPF regulator by calling 2918 0102 or by sending an email to mpfa@mpfa.org.hk.

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