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CCH® PENSION — 7/3/08

Large Defined Benefit Plans Produce Better Returns Than Comparable 401(k) Plans

From Spencer's Benefits Reports: Companies that sponsor both large defined benefit plans and 401(k) plans see better investment returns from their defined benefit plans, according to Watson Wyatt. This generally is true because larger plans have access to a wider variety of investment options and economies of scale. As reported in a recent Insider newsletter, Watson Wyatt used 5500 form data to calculate the median rate of return for plan sponsors that sponsored both a defined benefit plan and a 401(k) plan, each with at least 100 participants.

For the one-sixth largest plans in the 12-year period (1995-2006), the average median rate of return for defined benefit plans, 10.07%, was 1.21% higher than the rate for 401(k) plans, 8.86%. The returns for 401(k) plans of this group only exceeded the returns of the defined benefit plans in two years–1998 (14.7% versus 13.68%) and 1999 (16.08% versus 13.11%).

At the other end of the spectrum, for the one-sixth smallest plans in the 12-year period, the average median rate of return for 401(k) plans, 8.12%, was 1.03% higher than the rate for defined benefit plans, 7.09%. The 401(k) plans in this group outperformed the defined benefit plans in nine out of the 12 years. The defined benefit plans in this group outperformed the 401(k) plans in 2000 (1.43% versus -5.17%), 2001 (-3.51% versus -7.43%), and 2002 (-8.02% versus -12.33%).

Watson Wyatt also found that the median rate of return was 8.16% over the 12-year period for 401(k) plans with at least 100 participants that are the only retirement plan sponsored by the employer. These 401(k) plans had double-digit rates of return in seven of the 12 years: 1995 = 17.21%; 1996 = 12.63%; 1997 = 16.41%; 1998 = 13.84%; 1999 = 17.32%; 2003 = 20.16%; and 2006 = 11.56%. Only in 2000, 2001, and 2002 did the 401(k) plans experience negative rates of return.

For more information, visit http://www.watsonwyatt.com/us/pubs/insider/.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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