I wrote the following letter to the Straits Times on 5 August 2016 which expresses my opinion on the CPF Lifetime Retirement Investment Scheme:
I am glad that the Government will be introducing the Central Provident Fund (CPF) Lifetime Retirement Investment Scheme (LRIS) ("Simpler investment scheme to grow retirement nest egg"; yesterday).
However, more needs to be done to ensure the success of the scheme.
My concern is that the scheme may not attract sufficient investments.
The CPF Advisory Panel report suggests that such a scheme should be offered to CPF members alongside the existing CPF Investment Scheme (CPFIS).
Since there will still be several competing choices, the CPF Lifetime Retirement Investment Scheme is unlikely to have economies of scale.
We can learn from past experience, where passively managed low-cost unit trusts used to be offered under the CPFIS.
The fact that these funds failed to attract significant investments showed that CPF investors were either not aware of the benefit of low-cost investing or did not feel that such funds were "exciting" enough.
Given a choice, investors are unlikely to fancy such passively managed funds.
One alternative is to reduce the number of fund choices under the CPFIS by tightening the criteria for inclusion, for example, by lowering the annual fee that funds charge to investors and allowing the payment of sales charges using only cash instead of CPF money.
Another way to ensure economies of scale for the CPF Lifetime Retirement Investment Scheme is to allow cash investments from individuals and institutions, since there is a lack of low-cost passively managed funds available in Singapore.
The success of the CPF Lifetime Retirement Investment Scheme is also highly dependent on the financial literacy of CPF members.
CPF members' frequent switching of funds and attempts to time the market are evidence of poor financial knowledge.
These same CPF investors may blame the Government, should they lose money in the scheme.
Hence, the CPF Lifetime Retirement Investment Scheme needs to have safeguards in place.
These safeguards include customer knowledge assessment, product highlight sheets, free-look periods and the right to obtain financial advice before making an investment decision.
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