A December issue brief from the Center for Retirement Research at Boston College finds that in the two-plus decades between 1990 and 2012, defined benefit plans outperformed 401(K) and other defined contribution plans by a significant margin. The likely culprit? High fees.
“Pension coverage in the private sector has shifted from defined benefit plans, where professionals make investment decisions, to 401(k) plans, where participants are responsible for their own investment strategy,” the authors, which include CRR head Alicia Munnell, write in the brief. “The supposition is that individuals are not very good at investing their own money and face high fees. The question is whether this supposition is borne out by the facts. That is, are returns on defined contribution plans markedly lower than those on traditional defined benefit plans?”
They answer their own question by noting defined benefit plans outperformed defined contribution plans by 0.7 percent for the period in question.
“Since this differential remains even after controlling for size and asset allocation, the likely explanation is higher fees in defined contribution accounts,” they conclude. “The available data suggest that IRAs produce even lower returns than defined contribution plans, which implies trouble ahead given the massive amount of money that is being rolled over into IRAs.”
The findings reinforce the importance of low fees in retirement savings success. In September, CRR released an issue brief with similar findings that noted that, while traditionally skeptical of 401(k) and defined contribution plan effectiveness in aiding in retirement savings, they could in fact compete with their defined benefit counterparts. The latest brief would appear to back those claims, if not for embedded high fees.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
