Returns for defined benefit plans outperformed those for defined contribution plans by about 100 basis points in 2007 and 2008, according to an analysis by Towers Watson.
Both plan types lost money during the 2008 credit crunch, with DB plans returning -25.27% and DC plans, -26.2%, based on a survey of 79 employers that sponsor both types of plans.
The 2007 returns, taken from an analysis of more than 2,000 plans, put DB returns at 7.71% and DC at 6.78%.
Participants in DC plans were less likely than their DB counterparts to rebalance their stock portfolios when stock values ran up, leaving them more vulnerable to market declines, Mark Ruloff, director of asset allocation, said in a telephone interview.
He said many DB plans began shifting some assets away from equities in 2007 in anticipation of Pension Protection Act funding rules that became effective in 2008.
Also, between 1995 and 2007, larger DB and DC plans outperformed smaller plans. Over the 12-year period, the largest 16% of DB plans outperformed the smallest 16% by about 3 percentage points. The largest 16% of DC plans over the same time period outperformed the smallest by about 0.7 percentage points.
“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,” Mark Warshawsky, senior retirement researcher at Towers Watson, said in a news release. “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.”
