Analysis: Pensions vs. 401(k) returns

New research by Towers Watson shows that defined benefit plans achieved better rates of return than defined contribution plans in 2008 by the widest margin since the early 2000s. However, in 2009, DC plans outperformed DB plans.

By analyzing financial data filed to the Department of Labor, analysts found that DB plans had median investment returns of -23.44% in 2008, while DC plans had median returns of -26.12%. This means that DB plans outperformed DC plans by roughly 2.7 percentage points.

During the last bear market (2000-2002), the HR/benefits consulting firm conducted a similar analysis that showed DB plans outperformed DC plans by roughly 2.25 percentage points.

For the 2009 analysis, experts at Towers Watson examined 97 companies that only sponsor one DB plan and one 401(k) plan. Each plan sponsor had at least 100 participants.

The study primarily focused on those plan sponsors "to minimize the effects of specific employer or workforce characteristics uniquely associated with the sponsorship of only one plan type," analysts explain.

Although both plans witnessed stronger returns in 2009, DC plans outperformed DB plans. For example, DC plans had median investment returns of 19.11%, while DB plans only saw a return rate of 18.5%  

"Clearly, the slumping stock market in 2008 took its toll on both types of retirement plans. And while DB plans have historically outperformed DC plans in the long run, larger allocations to equities in DC plans may have led to their better investment performance in 2009," says Chris DeMeo, head of investment for North America at Towers Watson.

He further explains that "participants in 401(k) plans were less likely to rebalance their asset portfolios compared to the professionally managed DB plans, leaving them to reap the rewards of a rising stock market in 2009 — the same investing behavior that left them so vulnerable to drastic market declines in 2008."

Also keep in mind, "many DB sponsors had already shifted toward investment strategies that were more closely linked to the underlying liabilities, which mitigated their 2008 losses but also may have hindered their overall performance in 2009," DeMeo says.

Other key findings include:

  • In 2008, larger DB plans underperformed smaller plans by roughly 1.25 percentage points, while large DC plans outperformed smaller ones by the same difference.
  • Larger DB plans outperformed larger DC plans by 2.6 percentage points, a moderately higher margin than in the prior years’ bull markets and similar to results over the last bear cycle.
  • Smaller DB plans outperformed smaller DC plans by an even greater margin of roughly five percentage points.

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