DC Returns Beat DB Returns Following Recession

Towers Watson published a report analyzing investment rates of returns in defined benefit (DB) and defined contribution (DC) plans before and after the recession.

Before the recession, defined benefit (DB) plans outperformed defined contribution (DC)  plans by roughly 2.7 percentage points, with aggregate returns negative for both plan types, according to Towers Watson (DB plans had been earning higher returns since 1999). This pattern continued through the financial meltdown of 2008, as DB plans had lower equity concentrations than DC plans. In 2009, however, the higher equity allocations of DC plans paid off as equity markets saw large gains.  

The analysis based on Form 5500 financial and pension disclosure data through 2008 released by the Department of Labor and Form 5500 information for 97 large plan sponsors for 2009 from the Towers Watson 100 list of largest pension sponsors based on total obligations found 2008 was the worst year for both DB and DC plan returns.   

During the analysis period (1995-2008), on average, both plan types performed better on an asset-weighted basis than on a plan-weighted basis. Historically, larger plans outperform smaller plans because they have access to a wider variety of investment options, economies of scale and more investment expertise, Towers Watson said. In 2008, however, plan-weighted results were better for DB plans.  

Over the entire period, among the largest plans — the top sixth or top half — DB plans outperformed DC plans by 1.27 and .75 percentage points, respectively. For the smallest one-sixth, however, the advantage reverses, as DC plans outperformed DB plans. Looking within plan type, larger plans outperformed smaller plans over the 1995-2008 period.  

By contrast, in 2008, larger DB plans underperformed smaller plans by 1.25 percentage points, while large DC plans outperformed smaller ones by the same difference. Among large plan sponsors, DB plans outperformed DC plans by 2.60 percentage points, a moderately higher margin than in the prior years’ bull markets but similar to results over the last bear cycle. Among small plans, DB plans outperformed DC plans by an even greater margin of roughly 5 percentage points in 2008.  

The complete analysis, which also looks at the effect of fees on returns and the relation of equity share to returns, is here.