Guide to understanding fees for investing in unit trusts under the CPF Investment Scheme (CPF-IS)

The CPF Investment Scheme (CPF-IS) allows CPF members the option of investing their CPF savings in various investment products such as stocks, bonds, unit trusts (mutual funds), fixed deposits and insurance. CPF-IS members can invest their CPF savings in their CPF Ordinary Accounts (OA) above the first $20,000 and CPF Special Accounts (SA) above the first $40,000.

Fees are important to your investment returns - a difference of 1% in fees per annum is equivalent to over 240% of returns after 30 years. The CPF Board recognises that high fees are what led to poor investment outcomes for many CPF members, and have since announced the removal/reduction of charges in CPF members' interest.

Here's a look at the fees and sales charges involved when you invest in unit trusts via CPF-IS:

Changes in CPF-IS fees in 2018

In 2018, the government made changes to lower the costs of investing retirement funds under the CPF Investment Scheme (CPF-IS). The aim was to help improve investment returns and better align interests between financial advisors and CPF members. In March 2019, the Ministry of Manpower (MOM) announced that the second phase of lowering the CPF-IS sales charge and wrap fees cap will be deferred to 1 October 2020, instead of the original date of 1 October 2019. This change in the timeline was to provide financial advisors with more time to adjust to the revised CPF-IS fee structure.

Sales charges for unit trusts investments

From 2007 to 2018, financial advisors could levy a sales charge of up to 3% for unit trusts and investment-linked insurance policies offered under CPF-IS. As part of the changes implemented by MOM last year, the sales charge cap was lowered to 1.5%. After 1 October 2020, sales charges will be removed entirely.

The high upfront sales charges levied were detrimental to investment returns and incentivised financial advisors to churn accounts for commission. CPF Investment Scheme investors are currently already able to purchase unit trusts via online platforms without having to incur any sales charges. Removal of this sales charge will lower the cost of investing and better align interests between financial advisors and CPF members.

Wrap fees for unit trusts investments

Prior to 1 October 2018, financial advisors could charge a wrap fee of up to 1% per annum of assets under management (AUM) for CPF Investment Scheme account holders. This wrap fee covers advisory services and other services such as costs to maintain the wrap account.

Since 1 October 2018, the cap on wrap fees has been lowered to 0.7% per annum. This cap on wrap fee will be lowered further to 0.4% from 1 October 2020.

Fund-level fees

Since 1 January 2016, CPF Board has lower the cap on Total Expense Ratio (TER) for all CPF-IS Funds. The TER reflects a fund's operating cost as a proportion of its net assets, and includes the investment management fees, trustee fees, audit fees and other operational expenses. The TER is embedded in the fund's daily NAV (the 'price' of the fund), which means that you will only see it as a reduction of the NAV rather than as an expense on your brokerage statement.

These are the TER caps imposed on CPF-IS funds: 1.75% for higher risk funds, 1.55% for medium to high-risk funds, 0.95% for low to medium risk; and 0.35% for lower risk funds.

All-equity funds are classified as high risk, balanced and asset allocation funds are generally medium to high risk, fixed income funds may be low to medium risk.

Note that the TER will generally include a trailer fee, which is a recurring distribution commission that the fund management company pays to the distributor (brokerage, financial advisor etc) who sold you the fund. This fee is paid as long as you hold the fund in your portfolio, and is paid by the fund management company directly to the distributor. Trailer fees generally range between 0.5 -1%, and can make up half or more of the fund's total expense ratio.

How Endowus has the lowest all-in fees for CPFIS unit trust investing

At Endowus, our fees structure is compliant to the recommended changes before it is effected in October 2020. For our CPF investment portfolio, we do not charges any sales charges, our wrap/platform fee is at 0.4%.

Above and beyond complying with the mandatory fee structure, we also

1. Rebate all trailer fees that are usually paid to us by the fund managers
2. Have exclusive access to low cost Lion Global Vanguard funds

so that you have a better chance of reaching your financial goals with the lower fees involved.

Read more about unit trust fees here: A guide to getting ripped off: a dictionary on unit trust fees.

Understanding how fees can make a difference to your long-term returns is important. Maximise your CPF growth today.