3.5% guaranteed returns and 4.0% projected returns is very different.
For instance, if you ask me to invest into an emerging market bond fund with 4.5% projected yield, I would probably give it a miss and stick to 3.5% guaranteed yield.
End of the day it really depends on an individual risk tolerance, investment time horizon and appetite.
If you have 30 yrs before retirement, then probably an Equity fund is more likely to outperform 2.5%. Then again, these are based on historical performance. No one can predict if the next 10 years or 20 years we can fall into a great depression with all the debt building up.
Hence if you are allocating any CPF monies into stock market, you should be prepared for the worst case where it gives you a return that is below 2.5% p.a. or even negative return at the end of 10 or 20 years time.
In the most extreme drop, it took 8 years for S&P 500 prices to recover and 17 years for Nasdaq 100 to recover after the dot-com bubble burst in 2000, which was immediately followed by the crash of 2008.
