The Employees Provident Fund (EPF) allows for withdrawals to buy into unit trust funds. It used to be that approved unit trusts had no more than 30% invested overseas. This cap will now be removed from Aug 1, 2017. Here are six items you need to know about how this will affect your retirement savings:
1. Mechanics: Amount above ‘basic savings’ withdrawable for the Members Investment Scheme (MIS)
You can withdraw from ‘Account 1’ (70% of your EPF savings) any amount that is above the ‘basic savings‘, which I think is EPF’s idea of a buffer saving, to invest in unit trusts.
2. Foreign diversification is long overdue, we have too much invested at home
The ‘home-country’ bias is a serious problem as it doesn’t make diversification sense. Chances are our salary, property, stock market investments, unit trust purchases, employees’ share options, saving accounts, etc. are all home-based. This Malaysia-is-best mentality cuts off exposure to the growth and innovation happening elsewhere. Here is an excellent video about how you wouldn’t fill only Malaysians or players of one nationality into your football dream team. You would choose from the best around the world.
3. The ringgit has fallen sharply in the last few decades and who knows where it will go in the next few
I’m no FX trader, and neither am I an economist with an academic view of the ringgit’s fundamental value. I do know that the ringgit has weakened sharply over the decades: parity with the Sing-dollar in the 60-70s, 2.50 to the USD in the 70-80s, 3 point something in the 90s-2000s and now 4 and above. Going by a philosophy of loss-avoidance rather than unfettered ambition and given our mostly imported lifestyle, I think it’s good insurance to be globally diversified in the long run. While the ringgit’s immediate next move could very well be up, the myriad opportunities outside of Malaysia minimises missing out on any sharp ringgit upward swing.
4. Only withdraw to buy unit trusts if you want to invest differently from EPF
EPF has a quarter of its assets overseas and about 41% in stocks. You should only withdraw if you wish your asset allocation to be different from EPF’s, e.g. say for foreign investments to be 90% or equities 90% of your portfolio or if you want to go fully Syariah (note that EPF will also manage a Syariah fund soon). Why? Because EPF is an incredibly cheap manager: it only loses about 0.27% to management costs and charges zero sales commissions! Compare this to the exorbitant pricing of a typical foreign-focused fund (please note that I’m not singling out one particular fund, rather saying that this is typical of the average equity fund sold in Malaysia):
5. Look out for commission-free investing
When I spoke to EPF CEO Datuk Shahril Ridza Ridzuan, he put the elimination of commission paid to agents under the MIS firmly on the agenda: “…if you go through an agent and buy unit trust through their system, you are paying, if I’m not mistaken 3% commissions upfront. We plan to move everything online within the next couple of years and by eliminating that huge commission, we are giving that benefit back to our members…”. Industry lobby will likely be hostile to this move but sales fee removal will bring investing justice to the people.
6. Pity that ETFs aren’t on the approved list
ETFs (exchange-traded funds) are unit trusts that are listed and managed cheaply. They take emotions out of the fund management process by tracking a market index which further reduces costs by stopping unnecessary trading in and out of the market. There is no reason why ETFs like this Vanguard ETF listed in Hong Kong or this Bursa-listed ETF tracking the FBMKLCI shouldn’t be on the EPF approved list since they are like unit trusts but much cheaper. Hopefully, EPF will pick up on the idea soon.
In conclusion, EPF has been looking out for the interests of their members despite some fears of political kleptocracy (probably unfounded as of now since governance structures are strong under the present management). Two moves they have made over the years reflecting this are the decision to raise the equity portion of the portfolio and the push to quadruple foreign investments which buttressed income over the rough last year. The latest move to push for greater global diversification is laudable but which I believe comes with a cost caveat.