Plan Size Comparison
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."
Sylvia Pozezanac, senior consultant at Towers Watson, said the findings of the analysis are not surprising as "[m]any 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"—resulting in a larger proportion of fixed income instruments and other assets as opposed to equities, which fared better than stocks in the recent market downturn.