Defined contribution plans consistently underperform defined benefit plans, most likely due to higher investment fees, said a new research brief issued Tuesday by the Center for Retirement Research at Boston College.
Even after factoring in plan size and asset allocation, defined benefit plans outperformed defined contribution plans by an average of 70 basis points per year between 1990 and 2012, the report found.
Authors said investment fees, which typically account for 80% to 90% of total expenses, are the most likely reason for DC plans' underperformance as DC plans invest mainly through costly mutual funds and DB plans invest through other vehicles such as separate accounts.
The report also found that individual retirement accounts, which now hold more assets than DB or DC plans, produced even lower returns than DB or DC plans.
Based on a review of Investment Company Institute data and Form 5500 filings, the report found IRAs returned an average 2.2% per year between 2000 and 2012 , compared to 3.1% for defined contribution plans and 4.7% for defined benefit plans. The low return for IRAs might be due to fees or their higher allocation to “safe” but low-returning money market funds, the report said. Roughly 11% of assets in traditional IRAs are invested in money market funds compared to 4% for DC plans, according to the report.
The research report was written by Alicia Munnell, director of the Center for Retirement Research; Jean-Pierre Aubry, associate director of state and local research at the center; and Caroline Crawford, a research associate at the center.
The full report is available on the center's website.
