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CCH® PENSION — 02/24/10

DB plans outperformed 401(k) plans in 2007 and 2008, Towers Watson finds

Rates of return for defined benefit (DB) plans outperformed those for defined contribution (DC) plans, including 401(k) plans, in 2007 and 2008, according to a study released by Towers Watson. The analysis was based on Form 5500 financial and pension disclosure data released by the Labor Department.

The Towers Watson analysis found that DB plans outperformed 401(k) plans by roughly 1 percentage point in 2008, although both types of plans lost value. 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%, and a few had losses greater than 40%, more than any DB plan in the study.

DB plans in the study had median investment returns of -25.27% in 2008, while DC plans had median returns of -26.20%. A broader analysis of more than 2,000 plan sponsors shows that DB plans had a median return average of 7.71% while DC plans had a median return of 6.78% in 2007. According to Towers Watson, 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 both bull and bear stock markets.

Larger plans realized higher returns

The analysis also found that, between 1995 and 2007, larger retirement plans --both DB and DC --realized investment returns higher than those of smaller 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 points 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," said 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."

Source: Towers Watson press release, February 3, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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