The CPF Board just announced two new initiatives – Additional escalating payout option under CPF Life, and the Lifetime Retirement Investment Scheme (LRIS).
I want to focus on the LRIS and share my thoughts about it, the good, the bad, and some of my suggestions.
Before we go into that, let's understand some of the LRIS features:
- Few options for passively managed funds
- Low cost
- Minimise buying and selling
- Increase returns
The Good – Limiting The Investment Options
I believe the Government understood that people suffer from overconfidence. With a CPF OA interest of 2.5%, it isn't an attractive rate to most people. Some would prefer to take things in their own hands and invest CPF monies under the CPF Investment Scheme to get higher returns.
Sadly, the CPF reported that most members who invested their monies, or about 84% of them, did worse than the CPF OA's interests of 2.5%.
This is a rather poor report card for most people. The truth is most investors do not track their performance and do not hold themselves accountable to their actions. But they expect explanations from Temasek or GIC when results disappoint. Hypocrisy abound.
The problem is not a lack of investment options. It is the opposite, there were so many Unit Trusts and Stocks that could be invested into. Most people aren't able to do well enough because they lacked the aptitude to invest their own money. They fall into behavioral problems such as herd instinct, and loss aversion.
Reducing the investing options into just 5 options under the LRIS would help, but not totally.
The Good – Low Cost Passively Managed Funds
An actively managed fund means the fund manager with his army of portfolio managers and analysts would scour the investment world to select securities on behalf of their clients. They pride themselves with the wisdom, knowledge and experience to make good returns.
But the truth is most actively managed funds under-perform the relevant benchmarks after factoring the costs of running the funds.
Cost is one of the major drags on investors' returns. Using passively managed funds, the cost could be kept low because of a leaner fund management team. The managers could simply copy the portfolio components from an index such as the Straits Times Index without a big army of research staff.
In this context, most CPF members should get better returns under LRIS than CPF-IS.
The Bad – Adoption Is An Unknown
While I applaud the Government taking steps to improve the CPF system, I am not sure about the adoption rate for LRIS that would deem as satisfactory.
CompareFIRST was launched in early 2015 but it didn't attract much fanfare to date. I have not known anyone who uses it.
The Singapore Savings Bonds was launched mid-2015 and has always been under-subscribed since the first tranche was issued.
Looking at some of these past implementations, it is hard to be sanguine about the adoption of LRIS.
A Suggestion – Use Target Date Funds
CPF members could still have problem selecting a suitable fund out of the 5 options. To make it simpler, I would suggest to introduce target date funds instead.
If you are retiring age 65 at 2030, your CPF monies should be invested in the 2030 Target Fund. The manager will take care of the investment until your retirement age using passively managed funds to keep costs low. It should be as simple as that.
And to prevent people from withdrawing or buy and sell investments too regularly, impose a minimum lock-in period of 10 years. The best is to disallow withdrawal until 65, where the fund has reached the target date.
However, withdrawal exceptions can be given for CPF approved purchases such as buying a house or paying for education.
A Suggestion – Make It An Opt-Out
To further solve the adoption problem, and if the Government truly believes this is the best way to manage retirement planning, the LRIS should be an opt-out option just like Medishield Life. Each member, as long as he or she has a minimum 10 years to retirement, would be automatically enrolled into LRIS target funds. The member would be given a choice to opt out of it.
I like the LRIS idea and sees it as an improvement to CPF-IS. I also believe most CPF members will do better under the LRIS scheme if certain lock-in period is being imposed. There are room for improvements and if the Government strongly believe in LRIS, it should be made a de facto investment choice for CPF members. More attention has to be given on the awareness and adoption of LRIS, else it could falter like the previous initiatives.
You find out more perspective about LRIS from this article.