Default Investment Strategy Member and a 'Capital Guaranteed' Switch
Mrs Lee, aged 50, is a secondary school teacher with HK$1.5 million in her MPF account. She has never made an investment choice, so her savings are in the default investment strategy (DIS), split between the Core Accumulation Fund and the Age 65 Plus Fund. A bank MPF intermediary proposes switching 100% into a 'capital guaranteed' MPF fund. The fund has a fund expense ratio (FCR) of 2.2%, a five-year lock-in, and a guarantee that applies only if units are held to maturity; the guarantor is a single bank. The intermediary says the fund is 'safer than DIS' and 'will beat DIS returns'. Mrs Lee plans to retire at 60, has no emergency fund, and describes herself as 'very conservative'. She asks whether the switch makes sense.
1. Explain how the DIS applies to Mrs Lee and what would change if she switched entirely to the guaranteed fund.
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The DIS is an automatic, age-based strategy. It invests in two constituent funds: the Core Accumulation Fund, which has a higher equity exposure, and the Age 65 Plus Fund, which is more conservative. As the member ages, the strategy de-risks by reducing equity exposure and increasing bond exposure. At 50, Mrs Lee still has meaningful exposure to the Core Accumulation Fund; by 65 the allocation would be entirely in the Age 65 Plus Fund unless she chooses otherwise.
If she switches 100% to the guaranteed fund, the DIS no longer applies to that money. She would lose automatic de-risking and would have to decide herself whether and when to reduce risk. The guaranteed fund is not a continuation of DIS; it is a single fund with its own investment policy, guarantee conditions, lock-in and fees. The intermediary must not describe the switch as merely 'moving to a safer version of DIS'. The client should understand that she is giving up a statutory default mechanism and taking on fund-specific risks, including the guarantor's credit risk and the fund's liquidity terms.
2. Assess the suitability of the proposed switch and the intermediary's statements about safety and returns.
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The switch is difficult to justify on the facts. Mrs Lee is 'very conservative', has no emergency fund and plans to retire at 60. A five-year lock-in means she could be constrained until age 55, which is not necessarily fatal, but the guarantee applies only on holding to maturity and depends on a single bank guarantor. That is not the same as an unconditional capital guarantee, and it introduces credit concentration risk. The fund also uses a structure that may involve derivatives or complex conditions; the intermediary must explain those conditions, not just the word 'guaranteed'.
Calling the fund 'safer than DIS' is misleading unless the risks are properly explained. 'Capital guaranteed' does not mean the fund cannot fall in value before maturity, does not eliminate guarantor risk and does not guarantee a better return than DIS. Saying it 'will beat DIS returns' is a forward-looking promise that cannot be supported. The intermediary should complete a risk-profiling and suitability assessment, compare the fund with her existing DIS allocation, consider her liquidity needs and retirement horizon, and disclose the FCR, lock-in, guarantee conditions and commission. If she does not understand the product, the switch should not proceed.
3. Quantify the fee difference at a high level and identify the disclosure and documentation the intermediary should provide before any switch.
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The DIS has a statutory FCR cap of 0.95% per year (0.75% management fee plus 0.2% out-of-pocket expenses). The proposed fund's FCR is 2.2%, a difference of 1.25 percentage points per year. On HK$1.5 million, that is about HK$18,750 in the first year alone. Over ten years, simple arithmetic gives about HK$187,500 before compounding and before any performance difference; compounding would make the gap larger if returns are positive. The client should see this in dollar terms, not only as a percentage.
The intermediary should provide the Key Facts Statement, fund factsheet, offering document, FCR breakdown, guarantee terms, lock-in and withdrawal restrictions, and a clear explanation of the guarantor's role and credit risk. The intermediary should document the client's risk profile, her rejection of the DIS, the alternatives considered, the fee comparison and the client's written acknowledgement. If the client is only reacting to the word 'guaranteed', the intermediary should slow the process down and consider whether a switch is truly in her interests.