Towers Watson found that the difference in 2011 investment results counters a recent narrowing of the gap between DB and DC plan performance. The analysis of data from more than 2,000 plan sponsors showed DB plans had median investment returns of 2.74% in 2011, while DC plans had median returns of –0.22%. The nearly three-percentage-point difference is the widest margin by which DB plans outperformed DC plans since 1995, when Towers Watson first analyzed the rates of returns for both plan types.
Despite the large performance difference in 2011, the gap between DB and DC plans narrowed during the previous five-year period. Since 1995, DB plans have outperformed DC plans by 76 basis points annually, but in the last five years for which data is available (2007 through 2011), the difference shrank by roughly half, to 39 basis points. The smaller gap is mostly due to the strong stock market performance in 2009, when DC plans returned 20.86%, while DB plans gained 15.46%. According to the analysis, DB plans actually realized higher returns than DC plans in all other years between 2007 and 2011.
“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, 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.”
The analysis indicates performance in some DB plans was helped by sponsors shifting assets from equities to long-duration bonds in an effort to better match the value of plan liabilities with respect to interest rate changes. That move proved to be successful from a total investment return perspective, as the performance of long-duration bonds far outpaced that of equity markets during 2011.
“Given the strong performance of equities in 2012 and the declining interest rates that led to higher fixed-income returns, it’s likely that our next analysis will show improvement in both DC and DB plan returns,” said Dave Suchsland, senior retirement consultant at Towers Watson. “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. 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.”
The Towers Watson analysis was based on Form 5500 financial and pension disclosure data through 2011, as released by the U.S. Department of Labor. The population used for the analysis comprised companies that sponsor only one DB plan and one 401(k) plan, each with at least 100 participants. The analysis was limited to these plan sponsors to minimize the effects of specific employer or workforce characteristics uniquely associated with the sponsorship of only one plan type.
A more detailed discussion of the analysis can be found here.