Returns from defined contribution (DC) plans have nearly caught up to those earned through defined benefit (DB) funds for the first time in a decade, according to research by CEM Benchmarking.
From 2007 to 2016, DB funds averaged a 5.36 percent net return annually. DC plan returns trailed closely at 4.89 percent—“a substantial narrowing of the gap,” CEM reported.
The white paper Defined Contribution Plans Have Come a Long Way! was intended to provide an update to findings from a 2006 report on DB versus DC performance. Data confirmed CEM’s suspicion that much had changed, indicating “DB funds outperformed DC plans by 0.46 percent from 2007-2016,” compared to a “1.80 percent net return difference from 1998-2005.”
So, what gives? CEM pointed toward positive changes in DC plans—such as improved asset mix, better design and lower costs—as potential reasons returns are on the rise.
For instance, data from 1998 showed average asset allocations of 44 percent to cash, stable value and company stock for DC plans. By 2016, the same holdings were reduced to 25 percent. “These allocations have mainly moved to Target Date and Balanced funds,” according to CEM.
Moreover, plan sponsors are revising DC plan designs. A growing number now offer automatic enrollment in primary and supplemental plans (i.e., an 80 percent auto-enrollment rate in primary plans in 2016, compared to 62 percent in 2007). Plus, the vast majority of plan sponsors now have a default option—95 percent do in 2016, while only 79 percent did in 2007.
And finally, DB plan costs are climbing, thanks to “more sophisticated investment strategies” (e.g., private equity, venture capital, hedge funds) and their associated price tags. Meanwhile, DC plan costs have largely remained the same, allowing for a further closing of the gap in total net returns.
CEM analyzed data from 1,967 DB plans and 1,647 DC plans. Participant assets for 2016 totaled $3.6 trillion from 168 DB funds and $1 trillion from 147 DC plans.
Jessica Claeys is an editor, writer, and graphic designer, who has been creating both print and digital marketing and communications content for 10+ years.
Jessa Claeys is a licensed insurance producer in the state of Colorado and an insurance editor for Bankrate. She currently covers auto, home and life insurance with the goal of helping others secure a healthy financial future. Jessa has over a decade of experience writing, editing and leading teams of content creators. Her work has been published by several insurance, personal finance and investment-focused publications, including BiggerPockets, 401(k) Specialist, BP Wealth and more.