Towers-Watson: DB plans outperform DC plans

DB plans enjoyed a 2.74 percent rate of return in 2011, compared with a return of -0.22 percent for DC plans. DB plans enjoyed a 2.74 percent rate of return in 2011, compared with a return of -0.22 percent for DC plans.

Employer-sponsored defined benefit pension plans outperformed defined contribution plans in 2011 by nearly 3 percentage points, new research shows.

Global professional services firm Towers Watson arrives at this conclusion in a 2013 report, “Corporate Finance Matters.” The survey compares the median investment returns of defined benefit (DB) and defined contribution (DC) plans annually between 1995 and 2011, the most recent year for which data is available.

The recent survey of 2,080 DB and DC plans records an asset-weighted median investment rate of return of 2.74 percent for DB plans in 2011. This compares with a negative return of -0.22 percent plans for DC plans, a difference of 2.96 percent.

DB plans likewise surpassed the performance of DC plans in 2010 — a year in which both plan types achieved significant greater turns — by 0.98 percent (12.79 percent vs. 11.81 percent). DC plans did outperform DB plans in 2009 (20.86 percent vs. 15.46 percent, respectively).

However, the Towers report notes that DC plans achieved higher investment returns than their DB counterparts only four times going back to 1995. In addition to 2009, the years include:

  • 1999 (14.41 percent vs. 13.23 percent);
  • 1998 (15.24 percent vs. 14.22 percent); and
  • 1997 (19.65 percent vs. 18.80 percent).

“The lower level of benefits typically offered in [DC] plans, combined with weaker investment returns, means that fewer employees are likely to be prepared for retirement and that we’ll see a growing population of the ‘working retired,’” the report states. “To address this concern, DC plans have been taking on more characteristics of DB plans.”

The reports observes, for example, that some DC plans now offer auto-enrollment, automatic increases in participants’ plan contributions, professional investment management services and target-date funds — mutual fund portfolios whose asset allocation becomes more conservative as the target date (usually retirement) approaches.

Taken together, the report states, “these things can help plan participants improve their investment returns, which will become even more important as more workers without DB plans approach retirement.”

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