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Choice of pension management fees and effects on pension wealth

Noelia Bernal Lobato () and Javier Olivera

Journal of Economic Behavior & Organization, 2020, vol. 176, issue C, 539-568

Abstract: To shed light on the effects of individual choice on pension wealth, we study a policy change to the management fees of pension funds implemented by Peru’s government in 2013. The reform established a new balance fee as a default option; this fee is calculated as a percentage of the pension balance. Each individual had the initial option of keeping the previous management fee, a load factor fee calculated as a percentage of the individual’s salary. We use administrative data to simulate pension balances based on the individual’s choice of fee and the corresponding counterfactual. Our results indicate that the reform has been potentially adverse to 63.1% of individuals, of whom 41.4% were assigned to the default option and 21.7% voluntarily chose the load fee. These results reflect both the potentially negative unintended effects of the policy and an alarming lack of financial literacy among citizens. We also detect heterogeneity in the intensity of the losses and gains due to the reform, which caused greater losses than gains. In particular, younger and poorer individuals, as well as those automatically assigned to the balance fee, experienced higher losses. Moreover, the new fee scheme is also associated with increasing inequality between individuals’ pension wealth.

Keywords: Pension savings; Management fees; Individual retirement accounts; Pension reform; Inequality; Peru (search for similar items in EconPapers)
JEL-codes: D31 G28 J14 J32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:176:y:2020:i:c:p:539-568

DOI: 10.1016/j.jebo.2020.03.036

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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