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Hot news from the KWSP news desk…

Members of the Employees Provident Fund (EPF) will pay 50 per cent less in service charges for investment in unit trusts from January 1, 2008. The EPF announced that the service charges would be capped at three per cent, and fund management institutions cannot impose service charges beyond that.

This move as approved by the Minister of Finance will help members save on service charges. The service charges by local investment funds in Malaysia currently are relatively higher when compared with other countries like Singapore, United Kingdom, Japan and the United States.

“Members can enjoy better returns from their investment in unit trusts with the lower service charges,� said Datuk Azlan Zainol, Chief Executive Officer of the EPF.

Datuk Azlan also added, “We decided to cap the service charges at three per cent in the interest of our members and the fund managers�.

Currently members pay about five to six per cent in service charges.

“A study commissioned recently by EPF revealed that one of the major factors affecting the investment returns for our members is the high service charges imposed by the fund management institutions,� said Datuk Azlan.

How would the private fund management companies response to this initiative by KWSP?

Well, first of all, if initial service charges (ISC) for cash investment still maintains at 5-7 percent, such a move will definitely attract more EPF investment from the public, since everyone, almost everyone, likes a discount.

Also, with a double-standard such as this, what is the justification that cash investors are not allowed lowered ISC?

One major difference between EPF investment and cash investment is that the returns made from EPF investment is not withdrawable as cash, while with cash investment, you can withdraw the cash proceeds from the investment anytime you like.

I see this as a welcoming move, as long as the private fund management companies do not impose any double-standard policies on EPF investors, such as limiting investment from EPF to certain funds only.

Striking a balance between preserving and accumulating wealth can be quite tricky.

As I was discussing with my client moments ago, he was wondering if he should start investing his money into a mutual fund, rather than allocating his yearly bonus and salary increment into upgrading his existing insurance coverage.

For someone in his mid 20s, I suggest that you should always take up a comprehensive insurance coverage, but not an excessive one. At this age, you probably don’t need a RM 500,000 critical illnesses plan, nor a “Super VIP” hospitalization package. Just get moderate coverage with flexibility that allows you to upgrade in the near future.

I recommend that after having a comprehensive (not excessive) coverage, invest about 10% to 15% of monthly income in an aggressive mutual fund, without the intention to withdraw it for the next 5 years at least.

The logic behind such a strategy is that you should always cover any potential leaks by insuring your piggy bank before you start saving coins in it. Imagine what would happen if your piggy bank was accidentally damaged without sufficient coverage. All the investment including the interest that you could have made in your mutual funds might just be used up entirely to salvage the damage. Hence, a proper balance is always a good strategy.

What’s your strategy at this moment?

There are some major developments and changes to the KWSP allocations and it’s going to really affect how you will be enjoying the fruit of your labor.

The ‘Beyond Savings’ initiative is prompted by the EPF’s desire to enhance financial security in retirement in the light of inflation, a weakening extended family system, longer life expectancy and escalating medicals costs.

“The EPF’s main concern is the adequacy of savings for members during their retirement years as the average retirement savings for EPF members currently is inadequate. With Malaysians having a longer life span as well as inflation and escalating medical costs, many members may find themselves with insufficient funds if the issue of adequacy of savings is not addressed now,� said Datuk Azlan Zainol, Chief Executive Officer of EPF

Source: KWSP’s Website

Some facts, figures and proposed implementations:

Fact 1: 98% of EPF members withdraw their money at age 55, and 80% of them exhaust the fund in just 3 years.

Fact 2: According to Azlan, there are about 4,700 members with savings of more than RM1 million.

Fact 3: As of November, EPF members can withdraw a minimum of RM2,000 at any time, at intervals of at least 30 days.

Proposed 1: To discourage lump sum withdrawals, ad-hoc withdrawals will be introduced.

Proposed 2: Allowing members to use savings in excess of the “basic sum�in Account 1 for approved investment products (February 2008)

Proposed 3: Allowing members to withdraw savings from Account 2 to purchase critical illness insurance policy for themselves and immediate members (June 2008)

Proposed 4: Allowing children to top up parents’ savings in Account 1. Spouse can do this for each other too. (June 2008)

Proposed 5: Making it mandatory for big companies (more than 1,000 staff) to contribute via electronic mode. (June 2008)

Proposed 6: It will also soon be mandatory for employees aged 55 years and above to contribute to the EPF.

Proposed 7: Allowance for members of any age whose total savings have exceeded RM1 million to withdraw an amount in excess of RM1 million at any time to invest on their own.

Proposed 8: Members must have RM120,000 in Account 1 at age 55 to be able to withdraw their savings in Account 2 (January 2013).

Yes, and I get people asking me that all the time. If you are reading this, you’d probably asked someone that very same question- “Is now a good time to go into the market?”

Well, to answer that, I usually have a handy chart that shows 3 investor- one is a high school kid, another one is college fresh graduate and a senior position manager. Three of them invest the same amount of money each year, with the high school boy investing for the first 3 years, while our fresh grad invest for 10 years and our senior manager, only realizing the importance of retirement decided to invest for the next 20 years.

And in this scenario, let’s just assume all 3 of them retired at the same age- 60 years old. Let’s look at the chart below:

Besides appreciating the impact of compound interest can have on your money, the point I would like to illustrate here is that it really doesn’t matter how the market is doing today, or tomorrow or next week, but it’s how LONG you can keep the money in the game that matters most.

Another question most commonly asked is- “Should I invest one lump sum or should I spread the money into a few phases?”

Again, in the long term view of things and backed by historical data, lump sum investment is the way to go. As you can see from the chart below, the Fresh Grad managed to out-beat the high school kid if he’d invested the $30K, instead of spreading the $30K into a 10 year period. However, sadly for our senior manager who only thought about investing much later in his life couldn’t do anything to out perform the other two (unless of course he struck the jackpot in the casino).

Of course, if you don’t have “lump sum”, a regular investment is still better than nothing!

Scott Burns sums it up best when he gave the following example:

One of the best exercises to demonstrate this was done years ago by the American Funds group. They told the story of two investors. One had an uncanny knack for selecting the best day of the year to invest – the day prices were lowest. The other had an uncanny knack for selecting the worst day of the year to invest – he unerringly invested at market tops.

At the end of a 10- or 15-year period of annual investments, there is very little difference between the two investors. What is important is that they have invested over a long period of time.

Any future investments you make will work to diminish the impact of having picked a bad day.

So if somebody ask you when is a good time to invest, the answer should be pretty simple- right now, lump sum!

And hopefully with this short explanation, I can reduce the number of this question by 10%… and you can help me do that too!

Phew… at least Kuala Lumpur is not listed in the TOP 50 but that doesn’t mean that it’s a cheap place to live.

I find it hard to imagine what kind of retirement strategy people in these cities have…

1. Moscow, Russia
2. London, United Kingdom
3. Seoul, Korea
4. Tokyo, Japan
5. Hong Kong, Hong Kong
6. Copenhagen, Denmark
7. Geneva, Switzerland
8. Osaka Japan
9. Zurich, Switzerland
10. Oslo, Norway
.
.
.
14 Singapore, Singapore

Source: www.mercehr.com

I guess the common retirement strategies would be migration or work-till-you-dropped.

If you are age between 24-30, do yourself a favor and read up these facts: Counting on the nest egg

Or if the page is no longer available, you can download the PDF version here: Counting on the nest egg (PDF Version)

There’s a Malay saying that goes- “Kais pagi makan pagi, kais petang makan petang.” It basically means that for every sen earned, everything is spent on food and basic survival needs. Well, this strategy is useful if you can still “earn”. Don’t leave your future to chance.

And don’t blame inflation when the time comes, it’s been around since you’re born.

Inflation quoted in the article is 6%, and I say that’s being very conservative. For instance, LDP toll went from RM 1.00 to RM 1.60, that’s about 60% from the calculator, and remember, items in the CPI (Consumer Price Index) are mostly controlled items, so in other words, our inflation is somehow “managed” also.

I guess EPF is quite serious about the definition of the term “maturity”.

KWSP on the penalties of fraudulent withdrawal…

One member was jailed and fined RM2,000 while one member was fined RM3,000 or 2 months imprisonment. Two of them were slapped with a RM2,000 fine or a 2-month jail term. The fifth member was fined RM2,000 or a 1-month jail term. All five paid their fines.

For the record, those found guilty under the EPF Act 1991 are liable to a maximum jail sentence of three years, or a maximum fine of RM10,000, or both.

“It is most unfortunate that some members resort to fraudulent means to withdraw their savings. It is even sadder when some of them are willing to pay part of their own hard-earned savings to unscrupulous third parties. Members should realise that they are not cheating the EPF of any money; they are only cheating themselves,” added Puan Rusma.

There’s a new form in town from our folks in KWSP. Here’s an excerpt on the introduction of the new KWSP 6 (FORM A).

Source: KWSP’s website

As mentioned in our earlier correspondence, we would like to inform you that EPF is introducing minor amendments to the Form A format by inserting one additional column labeled as ‘UPAH’. Employers are required to complete this column with employees *wages for the month. HOWEVER, THE EFFECTIVE DATES FOR THIS AMENDMENT HAVE BEEN CHANGED AS FOLLOWS:-

* Employers using pre-printed Form A will start using the new format for payment of contribution for the month of March 2007 (salary month of February 2007).

* Employers using electronic Form A (diskette / CD) will start using the new format for payment of contribution for the month of February 2007 (salary month of January 2007).

* Employers using Internet Banking will start using the new format for payment of contribution for the month of January 2007 (salary month of December 2006).

To assist you prepare for the changes, kindly download the following documents:-

* Notice to employers

* Technical specification (file format) for diskette/CD submission

* Sample contribution data file

* Guideline for submitting diskette/CD for testing

* Sample Form A

An interesting concept. While to structure a low risk fund is generally much easier, I still think that a proper retirement strategy does not only depends on the fund companies alone, the retirees themselves should also do their bit. Someone who’s retiring in 3 years time but still would like to see 20% return every year might be expecting a rather unrealistic result.

New unit trust funds for retirement savings

The Securities Commission (SC) will collaborate with the unit trust industry to introduce a new category of unit trust funds (UTFs) that will fulfil the needs of investors who wish to save for retirement purposes.

“The introduction of the funds is part of SC initiatives to accelerate growth and enhance investor protection in the unit trust industry,� the SC said in a statement.

It said the new UTFs would have lower investment costs and a more conservative investment strategy.

To really see the effect of a money-make-money investment, I believe that one of the most important element will be time. The longer time you have the better chance you have to see your money works harder with the prevailing interest rate. Since there are quite many who don’t like the idea of slow wealth accumulating process, evident with the flourishing Get Rick Quick or Skim Cepat Kaya industry in Malaysia, to inform the investors that accumulating wealth takes time, they will probably give you a “Huh?” reaction.

Hence, a proper retirement saving trust fund should also take into account the minimum investing age or probably a locked-in period on the fund.

Another important element is the responsibility of the fund companies to discharge their fund’s characteristics, especially the risk level and various charging mechanism to the public IN PLAIN ENGLISH. If it’s too hard to explain in layman’s term, then at least strive to give some examples. Let the investors feel that you care about their money!

For example, in the prospectus or marketing brochures, don’t just put PTR= 0.68 times and expect the investor to find what that means in the dictionary. Elaborate that PTR= 0.68 times means that over a period of 12 months, the Fund has been buying new securities or selling off securities at a rate of 0.68 times. The higher the rate, the more expensive it is to maintain the fund, since higher turnover rate translate to higher transaction cost.

Well, that might still be rather unintelligible, but I hope you get the idea. Fund companies should do their best to explain everything in clear cut language, without the need to interpret further.

To increase fund companies’ accountability, you can even stick the Fund Manager’s portrait photo on the funds they manage. Why not? Wouldn’t the average investors want to know the face of the man behind the money they are investing with? And it seems 100% logical that if one good Fund Manager is bailing out from the fund, investors should also get wind of it, since fund performance is very much related to the fund manager’s expertise.

Wouldn’t you want to invest in the fund above?

Well, there are a lot more factors that can help increase the transparency and accountability of fund companies and I believe the investors have every rights under the sun to take action on companies that do not fully disclose the necessary information to protect against their money.

Though I’d like to believe that the fund companies need our money more than we need theirs, I think the direct interest of both the companies and investors are mutual- to generate more money when the market closes for the day. However, if there’s a fund company that constantly put investor’s interest first, I am buying!

Instead of a 10 year plan, I think a better solution would be to educate the public on the importance of retirement planning, if possible, way ahead in the early years of one’s education.

One should realize that one do not plan retirement 5 years before going fishing or playing golf everyday. Not even 10 years. A proper retirement planning strategy should be in place the moment you start working and earning decent income. If you think your EPF or your pension-scheme is going to help you retire in style, think again!

When the idea of retirement is non-existent, there’s no way to plan for it, since you can’t plan something that doesn’t even exist! People just don’t imagine themselves living in conditions that’s far worse than when they are working. Most also can’t accept the fact that bad planning of their finances can lead to them not being able to enjoy the fruits from their decades of labor.

Finance-related should be taught in schools and kids should learn about how money can affect their lives and the people around them. They should learn about how to make wise decisions when it comes to dealing with money.

In the article below, MARA is also advised not to recover money via EPF deductions. Actually, instead of not allowing it, why not allow the loan defaulters themselves to make the choice? Let them choose whether to deduct from it or not. If they can’t even pay off the loan via EPF, I cannot imagine if there’s any other source of income which they can use to pay it off.

10-year planning for pension scheme…

Malaysia has 10 years to plan and prepare an appropriate pension scheme to meet the needs of its larger aging population by 2016.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said only 6% of the country’s population was above 60 years old now, but statistics suggested that a significantly larger segment would be above 60 by 2016.

It’s your life, why let others do the thinking for you?