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Research Finds 401(k) Rates of Return Lag Pension Plans

Defined-benefit pension plans are consistently racking up higher rates of return than 401(k) plans, according to a new analysis.

June 19, 2008
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Defined-benefit pension plans are consistently racking up higher rates of return than 401(k) plans, according to an analysis released Wednesday, June 18.

Between 1995 and 2006, the median annual rate of return for defined-benefit plans averaged 10.3 percent, compared with 9.21 percent for 401(k) plans, according to the Watson Wyatt Worldwide analysis.

During 2006, the most recent year included in the analysis based on pension reports employers file with the federal government, the median rate of return for defined-benefit plans was 12.9 percent, compared with 11.3 percent for 401(k) plans.

The biggest difference in rates of return during the 12-year period was in 2000, when the median rate of return for defined-benefit plans was -0.01 percent, compared with a 2.75 percent loss for 401(k) plans.

Watson Wyatt consultants say it isn’t surprising that rates of returns for defined-benefit plans are outpacing 401(k) plans.

The professionals whom employers retain to manage their defined-benefit plans “have considerable financial education, experience and discipline, as well as access to sophisticated investment tools,” Alan Glickstein, a senior retirement consultant in Watson Wyatt’s Dallas office, said in a statement.

“These advantages, coupled with a much longer investment time horizon, help DB plan sponsors maximize their returns and maintain well-diversified portfolios,” he added.

By contrast, 401(k) plan participants often lack the time to actively manage their investments and also lack professional investment experience, reducing rates of return, Glickstein said.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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