Journal of Law, Finance, and Accounting > Vol 2 > Issue 1

Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment

Assaf Hamdani, The Hebrew University and ECGI, Israel, , Eugene Kandel, The Hebrew University, CEPR and ECGI, Israel, , Yevgeny Mugerman, The Hebrew University, Israel, , Yishay Yafeh, The Hebrew University, CEPR and ECGI, Israel,
Suggested Citation
Assaf Hamdani, Eugene Kandel, Yevgeny Mugerman and Yishay Yafeh (2017), "Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment", Journal of Law, Finance, and Accounting: Vol. 2: No. 1, pp 49-86.

Publication Date: 06 Jun 2017
© 2017 A. Hamdani, E. Kandel, Y. Mugerman, and Y. Yafeh
Financial markets
Institutional InvestorsPension FundsIncentive FeesDefined Contribution


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In this article:
1. Introduction 
2. Related Literature 
3. Institutional Background, Data and Empirical Approach 
4. Data and Results 
5. Regulatory Solutions 
6. Concluding Remarks 


Concerned with excessive risk-taking, regulators worldwide generally prohibit performance-based fees in pension funds. Presumably, competition can substitute for incentive pay in providing incentives for fund managers to serve their clients’ interests. Using a regulatory experiment from Israel, we compare the performance of three exogenously-given long-term savings schemes: Funds with performance-based fees, facing no competition; funds with assetsunder- management (AUM)-based fees and virtually no competition; and funds with AUM-based fees, operating in a competitive environment. Funds with performance-based fees exhibit the highest risk-adjusted returns without assuming more risk. Competitive pressure is not associated with similar outcomes, suggesting that incentives and competition are not substitutes in the retirement savings industry.