Fee-ling Stuck? Provider Choice in a Mandatory Defined Contribution Pension System

Fees play a critical role in shaping the pension benefits provided by defined contribution (DC) pension funds. Even small differences in fees, when compounded over a long contribution period, can lead to substantial disparities in retirement income. In this study, we focus on Chile — a country with a large, mandatory DC pension system — to examine how individuals choose among pension fund administrators. Despite a regulated fee structure that ensures transparency and the absence of switching costs, we observe significant fee dispersion across providers and low switching rates among participants. Our findings reveal that individuals with higher financial literacy and a better understanding of the institutional framework are significantly more likely to switch providers, thereby minimizing fees.