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. CPFIS 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.

Here’s a look at the fees and sales charges to invest in unit trusts via CPFIS:

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 CPFIS 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 charge

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-IS 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

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-IS members. 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 CPFIS 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.

Impact of fees on our investment returns

Before the changes, the fees incurred when investing with your CPFIS would have amounted to up to 4% of your investment capital. From 1 October 2020 onwards, this fee will be capped at just 0.4% of your investment capital. This is excluding any fund-level fees (expense ratio) of up to 1.75%.

Fees make a significant impact on our investment returns over the long-term.  A $100,000 investment in a fund earning 7% per annum (a good return) but with a fee of 1.75% versus 0.75% will deprive you of $152,000 in earnings over 30 years. Read more about unit trust fees here: A guide to getting ripped off: a dictionary on mutual fund fees