Corporate defined benefit plans outperformed defined contribution plans in 2011 by the widest margin in more than 15 years, according to an analysis by Towers Watson.
DB plans had a median return of 2.74% compared to a median -0.22% for DC plans. It is the widest margin since 1995, the first year Towers Watson analyzed returns for both plan types.
However, the gap between DB and DC plans has narrowed over the last five years to about 39 basis points annually in favor of DB plans from 76 basis points annually since 1995. DC plans largely narrowed the gap with more than five percentage points of outperformance in 2009 due to strong equity markets. DC plans historically have significantly higher allocations to equity.
The size of a plan has a large bearing on the gap between DB and DC plans, according to the analysis. Among the largest one-sixth of plans, DB plans had an average 99 basis points of outperformance compared to DC plans since 1995, while DC plans average 114 basis points of outperformance over DB plans among the smallest one-sixth of plans.
Last year, the largest DB plans had 311 basis points of outperformance compared to DC plans. But the model did not follow for smaller plans: DB plans had 121 basis points of outperformance compared to their DC brethren.
“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, in a news release. “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.”
According to the analysis, DC plans tend to outperform DB plans in market booms, largely because of the high allocations to equity, while DB plans perform better in down markets. However, that disparity is poised to change in the next decade with the large-scale adoption of target-date funds, which place older participants into larger bond allocations, according to Towers Watson.
The analysis is based on Form 5500s and includes only companies that sponsor one DB and DC plan each.
