Does the Right to Choose Matter for Defined Contribution Plans?

14 Pages Posted: 6 May 2020

See all articles by Kin Ming Wong

Kin Ming Wong

Hong Kong Baptist University (HKBU)

Kwok Ping Tsang

Virginia Polytechnic Institute & State University

Multiple version iconThere are 2 versions of this paper

Date Written: April 2017

Abstract

We find that sensitivity of fund flows and fund performance are both related to participants' right to choose their investments in defined contribution plans. Under the Mandatory Provident Fund system of Hong Kong, both employers and employees are required to contribute to a retirement account. Originally, employees' investment choices were restricted to a subset of funds chosen by their employers. The system was later modified so that employees are allowed to invest in any fund within the system. We present evidence that flows of fund have become more sensitive to past fund performance after this policy change, and that average fund performance in the system has also improved. Based on the improvement in fund performance, we estimate the accumulated cost of the lack of choice to be around 10% of the current total asset value of the system.

JEL Classification: G14, G18

Suggested Citation

Wong, Kin Ming and Tsang, Kwok Ping, Does the Right to Choose Matter for Defined Contribution Plans? (April 2017). Contemporary Economic Policy, Vol. 35, Issue 2, pp. 278-291, 2017, Available at SSRN: https://ssrn.com/abstract=3593644 or http://dx.doi.org/10.1111/coep.12186

Kin Ming Wong (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Kwok Ping Tsang

Virginia Polytechnic Institute & State University ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

HOME PAGE: http://https://sites.google.com/site/byrontkp/

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