DB plans outperformed DC plans by largest margin since mid-90s, Towers Watson reports

Investment returns in defined benefit (DB) pension plans outperformed those in defined contribution (DC) plans — predominantly 401(k) plans — in 2011 by the widest margin since the mid-1990s, according to a recent analysis by Towers Watson. The analysis of more than 2,000 plan sponsors found that DB plans had median investment returns of 2.74% in 2011, while DC plans had median returns of –0.22%. The difference in 2011 investment results counters a recent narrowing of the gap between DB and DC plan performance. The analysis was based on Form 5500 financial and pension disclosure data through 2011, as released by the Department of Labor (DOL).

Despite the large performance difference in 2011, the gap between DB and DC plans narrowed during the previous five-year period, Towers Watson found. 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%. DB plans actually realized higher returns than DC plans in all other years between 2007 and 2011.
DBs score consistently better

“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 notes that 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.”

Source: Towers Watson press release, May 22, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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