Investment returns from defined benefit (DB) pension plans continue to outperform those from 401(k) and other defined contribution (DC) plans, according to an analysis by consultancy Towers Watson.
Pension plans have the advantage of investing for a large pool of people over a longer time frame, which provides greater long-term growth. Similarly, the study found that bigger pension plans outperformed smaller ones and that participants in large 401(k)s did better than participants in small plans.
Companies that offer pension plans typically pay administrative costs directly to plan administrators and other service providers, rather than deducting these expenses from plan assets, and so they do not count those fees when reporting investment returns. But 401(k) administrative expenses are often included in the fees that participants pay, lowering their returns. That difference alone gave pension plans a 0.66 percent annual advantage over the past 17 years, Towers Watson found.
“Since the beginning of our study, DB plans have consistently achieved better investment returns than DC plans except during boom stock market years,” said Chris DeMeo, head of investment for the Americas at Towers Watson. “However, the spread between the two has been narrowing, and with many sponsors adjusting the asset allocation strategy of their DB plans to better match assets to liabilities, the disparity may diminish further in the future.”
“DB plans have some inherent advantages that have helped them historically outperform their 401(k) counterparts, such as lower investment fees, longer investment time horizons and management by investment experts," said Dave Suchsland, senior retirement consultant at Towers Watson. "However, with more DC plans assuming some DB plan characteristics—most notably the ability to rebalance assets through the use of professionally managed target-date funds—DC plan participants now have additional opportunities to improve the performance of their portfolios.”
Towers Watson's analysis was based on Form 5500 financial and pension disclosures through 2011, the most recent data released by the U.S. Department of Labor.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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