Rates of return for defined benefit (DB) pension plans outpaced those for 401(k) and other defined contribution (DC) plans in 2008 when the economic crisis began to unfold, according to an analysis by consultancy Towers Watson.
DB plans outperformed 401(k) plans by roughly 1 percentage point in 2008, although both types of plans lost value, the analysis found. Additionally, while most DB plans incurred losses for 2008, some actually reported small positive returns. By contrast, all DC plans in the study had losses of at least 10 percent, and a few had losses greater than 40 percent—more than any DB plan in the study.
"Participants in 401(k) plans were less likely than DB plan sponsors to rebalance their asset portfolios while stock values ran up, leaving them more vulnerable to market declines," says Mark Ruloff, senior consultant at Towers Watson. "Many DB sponsors had been reducing their exposure to equities and already shifted toward more conservative investment strategies in 2007, which helped to mitigate their losses."
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Adopting more conservative investment strategies
in 2007 when stock values were high
helped to mitigate losses in 2008.
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The 2008 results are based on a survey of 79 employers that sponsor one DB plan and one 401(k) plan, using Form 5500 financial and pension disclosure data released by the U.S. Department of Labor, plus a separate Towers Watson survey of plan sponsors about their Form 5500 information.
According to the analysis, DB plans had median investment returns of -25.27 percent in 2008, while DC plans had median returns of -26.20 percent.
A year earlier, a broader analysis of more than 2,000 plan sponsors shows that DB plans had a median return average of 7.71 percent in 2007 while DC plans had a median return of 6.78 percent in 2007. This finding is consistent with earlier analyses, which show that DB plans have consistently outperformed DC plans by an average of about 1 percentage point per year during bull and bear stock markets.
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Median Investment Returns:
Defined Benefit vs. Defined Contribution Plans |
|
|
2008 |
2007 |
|
Defined benefit pensions |
-25.27 |
7.71 |
|
Defined contribution plans |
-26.20 |
6.78 |
|
Source: Towers Watson |
Big Plans Did Better
Between 1995 and 2007, larger retirement plans—DB and DC—realized investment returns higher than those of small plans. During this period, the largest sixth of the analyzed DB plans outperformed the smallest sixth by approximately 3 percentage points, compared with a difference of approximately 0.7 percentage point between the median investment returns of the largest and smallest 401(k) plans.
"Size influences the performance of DB plans more than it affects DC plans, because larger pension plans can afford to spend more on professionals to manage assets and use more sophisticated strategies," says Mark Warshawsky, senior retirement researcher at Towers Watson. "On the other hand, 401(k) plan participants often do not optimize their investment strategies. Even with more investment education and better default investment options for 401(k) plan participants, DC plans do not replicate all the advantages of DB plans and are unlikely to outperform DB plans, which generally have extended investment horizons and economies of scale."
"It is not surprising that DB plans have outperformed DC plans in the most recent bear market," adds Sylvia Pozezanac, senior consultant at Towers Watson. "Many DB plans, especially the larger ones, have adopted strategies where assets are invested in a way that their movement would more mirror those of pension liabilities and have diversified into alternative investments. This often results in a larger proportion of fixed-income instruments and other assets as opposed to equities. Bonds and alternatives fared better than stocks in the recent market downturn."
Stephen Miller is an online editor/manager for SHRM.
Related Article:
Helping 401(k) Participants Pays Off, SHRM Online Benefits Discipline, February 2010
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