February 8, 2010
Defined Benefit Plans Beat 401(k)s By More Than 1%
Defined benefit plans delivered an average return of 10.13% between 1995 and 2007, whereas 401(k) plans rose an average of 9.06% a year, according to a report from consulting firm Towers Watson. While that differential is just over one percentage point, the six largest DB plans analyzed outperformed the six smallest by three percentage points in that timeframe.
The 1% average long-term edge continued in 2008, even though both types of plans lost value. However, whereas defined contribution plans lost 10% or more - some plummeting by as much as 40% - some pension plans reported small positive returns. In fact, the median investment return of DB plans in 2008 was 25.27%, whereas the median return of DC plans was -26.20%.
The 2008 results were based on a survey of 79 employers that sponsor both a pension and a 401(k), based on a Towers Watson survey of firms' Form 5500.
A broader analysis of more than 2,000 plan sponsors, based on Form 5500 filed with the Department of Labor, found DB plans had a median return average of 7.71%, and DC plans 6.78%. This finding is consistent with earlier analyses that showed DB plans outperforming DC plans by one percentage point in both bull and bear stock markets.
"Participants in 401(k)s were less likely than DB plan sponsors to rebalance their asset portfolios while stock values ran up, leaving them more vulnerable to market declines," explained Mark Ruloff, a 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."