DB Plans Outperform 401(k)s

Rates of return for defined benefit (DB) pension plans outpaced those for employee-directed 401(k) plans over the last decade, according to an analysis by Watson Wyatt Worldwide.

In a press release, Watson Wyatt said it found that DB plans outperformed 401(k) plans by 1.7 percentage points in 2003, 2.0 points in 2004, 1.1 points in 2005, and 1.6 points in 2006. Overall, from 1995 through 2006, DB plans outperformed defined contribution (DC) plans by an average of about 1% per year over the period.

“The professionals who manage pension funds have considerable financial education, experience and discipline as well as access to sophisticated investment tools. These advantages, coupled with a much longer investment time horizon, help DB plan sponsors maximize their returns and maintain well-diversified portfolios for the benefit of the plan participants,” said Alan Glickstein, a senior retirement consultant at Watson Wyatt, in the release.

The analysis also found that between 1995 and 2006 larger retirement plans — both DB and DC — realized investment returns higher than those of smaller plans. Over this period, the largest one-sixth of the analyzed DB plans outperformed the smallest one-sixth by approximately 3%, compared with a difference of about 0.7% between the 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 hire more expertise to manage assets, while 401(k) plan participants choose their own investments and have access to similar investment options regardless of plan size, Watson Wyatt explained.

The analysis by Watson Wyatt is based on Form 5500 financial and pension disclosure data released by the U.S. Department of Labor. Only companies that sponsor one DB plan and one 401(k) plan, each with at least 100 participants, are included in the data.

More on the analysis can be found at www.watsonwyatt.com/DBvsDCinvestmentreturns.