Employee pension plans in most countries restrict participant choice to a pre-selected 'menu' of funds. How would funds react if participants are allowed to choose funds outside such a limited menu? This thesis exploits a policy reform to study this counterfactual, using the launch of the Hong Kong Employee Choice Arrangement (ECA) in November 2012. I find that funds charge lower fees after the enforcement of ECA. Meantime, they adopt a less active investing strategy and gross return deteriorates. Consistent with funds' strategy to compete on price at the cost of quality, flow exhibits stronger sensitivity to fee than activeness. The findings show that freedom of choice affects investors' wealth indirectly through the endogenous response of funds, not directly through investors...[ Read more ]

Employee pension plans in most countries restrict participant choice to a pre-selected 'menu' of funds. How would funds react if participants are allowed to choose funds outside such a limited menu? This thesis exploits a policy reform to study this counterfactual, using the launch of the Hong Kong Employee Choice Arrangement (ECA) in November 2012. I find that funds charge lower fees after the enforcement of ECA. Meantime, they adopt a less active investing strategy and gross return deteriorates. Consistent with funds' strategy to compete on price at the cost of quality, flow exhibits stronger sensitivity to fee than activeness. The findings show that freedom of choice affects investors' wealth indirectly through the endogenous response of funds, not directly through investors' capital allocation decisions.