Freedom of Choice in Pension Plans: Evidence from a Quasi-Natural Experiment

Abstract

Employee pension plans in most countries limit participants' choice to a pre-selected 'menu' of funds. How would funds react if participants were allowed to choose funds from outside of such a limited menu? This paper exploits a pension policy reform in Hong Kong to study funds' reaction using a difference-in-difference approach. The findings indicate that funds, catering to participants' preferences, started charging lower fees after the reform. In the meantime, they adopted a less active investment strategy and gross return deteriorated. The findings suggest that the freedom of choice affects participants' wealth indirectly through the endogenous response of funds.

Keywords: Pension savings, Portfolio choice, Competition, Activeness, Managerial shirking

JEL Classification: G11, G15, G18, G23