Defined Benefit Plans Outperformed 401(k) Plans
During 2007 and 2008, Towers Watson Analysis
February 03, 2010 08:03 AM Eastern Time
NEW YORK--(EON: Enhanced Online News)--Rates of return for defined benefit (DB) pension plans outpaced
those for defined contribution (DC) plans, including employee-directed 401(k) plans, in 2007 and also in 2008,
when the economic crisis began to unfold, according to a new analysis by Towers Watson (NYSE, NASDAQ:
TW), a leading global professional services company.
The Towers Watson analysis found that DB plans outperformed 401(k) plans by roughly 1 percentage point in
2008, although both types of plans lost value. Additionally, while most DB plans incurred losses for 2008, some
actually reported small positive returns. By contrast, all DC plans in the study had losses of at least 10%, and a few
had losses greater than 40%, more than any DB plan in the study. The 2008 results are based on a survey of 79
employers that sponsor one DB plan and one 401(k) plan. These results will be updated and expanded as additional
data become available.
According to the analysis, DB plans had median investment returns of -25.27% in 2008, while DC plans had median
returns of -26.20%. A broader analysis of more than 2,000 plan sponsors shows that DB plans had a median return
average of 7.71% while DC plans had a median return of 6.78% in 2007. This finding is consistent with earlier
analyses, which show that DB plans have consistently outperformed DC plans by an average of about 1 percentage
point per year during both bull and bear stock markets.
“Participants in 401(k) plans were less likely than DB plan sponsors to rebalance their asset portfolios while stock
values ran up, leaving them more vulnerable to market declines,” said Mark Ruloff, senior consultant at Towers
Watson. “Many DB sponsors had been reducing their exposure to equities and already shifted toward more
conservative investment strategies in 2007, which helped to mitigate their losses.”