Pensions Outperformed 401k Plans
WASHINGTON, DC, June 18, 2008 -- Rates of return for defined benefit (DB) pension plans out paced those for employee-directed 401k plans during the most recent bull market from 2003 to 2006, according to an analysis by Watson Wyatt Worldwide, a leading global consulting firm.
The comparison of investment rates of return between DB and defined contribution (DC) plans found that DB plans outperformed 401k plans by 1.7 percentage points in 2003, 2.0 points in 2004, 1.1 points in 2005 and 1.6 points in 2006. Overall, from 1995 through 2006, DB plans outperformed DC plans by an average of about 1 percentage point per year over this 12-year period. This would translate into a cumulative dollar difference of nearly 14 percent for money invested at the start of the period.
"Achieving consistently high investment returns in volatile financial markets is challenging, but it's not surprising that, over time, DB plans have outperformed DC plans," said Alan Glickstein, a senior retirement consultant at Watson Wyatt. "The professionals who manage pension funds have considerable financial education, experience and discipline as well as access to sophisticated investment tools. These advantages, coupled with a much longer investment time horizon, help DB plan sponsors maximize their returns and maintain well-diversified portfolios for the benefit of the plan participants."
Asset-Weighted Median Rates of Return for DB and 401k Plans
| Year |
Defined Benefit Plans |
401k Plans |
Differences in
Median Rates |
| 2006 |
12.9% |
11.3% |
1.6% |
| 2005 |
7.7% |
6.7% |
1.1% |
| 2004 |
11.8% |
9.8% |
2.0% |
| 2003 |
21.4% |
19.7% |
1.7% |
* Difference may not be exact due to rounding.
The Watson Wyatt analysis also found that between 1995 and 2006 larger retirement plans — both DB and DC — realized investment returns higher than those of smaller plans. Over this period, the largest one-sixth of the analyzed DB plans outperformed the smallest one-sixth by approximately 3 percentage points, compared with a difference of about 0.7 percentage points between the investment returns of the largest and smallest 401k plans.
Size influences the performance of DB plans more than it affects DC plans because larger pension plans can hire more expertise to manage assets, while 401k plan participants still choose their own investments and have access to similar investment options regardless of plan size.
"Individual participants in DC plans have more volatile asset allocations over time as well as a greater range of investment returns, both positive and negative, even within the year," said Mark Warshawsky, director of retirement research at Watson Wyatt. "In an environment where more and more employees have access only to a DC plan, this research underscores the important and continuing role DB plans play in providing efficient and secure retirement benefits."
The analysis, the latest in an ongoing series by Watson Wyatt, is based on Form 5500 financial and pension disclosure data released by the U.S. Department of Labor. Only companies that sponsor one DB plan and one 401k plan, each with at least 100 participants, are included in the data reported here. A more detailed discussion of this analysis can be found at www.watsonwyatt.com/DBvsDCinvestmentreturns.
About Watson Wyatt
Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,000 associates in 32 countries and is located on the Web at www.watsonwyatt.com.
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