The evolution of retirement plans from DB (defined benefit) to DC (defined contribution) to IRAs (individual retirement account) shows a significant growth in assets but a diminution of returns according to the Center for Retirement Research at Boston College (CRR). DB assets had $3.1 trillion at the end of 2014 compared to $5.4 trillion in 401(k)s and $7.4 trillion while returns at DB plans from 1990-2012 were 0.7% better than DC plans which outpaced IRAs by 1%.
Though 0.7% is significant, it’s lower than one might imagine given higher fees and much less sophisticated investors – the lower rate for IRAs is concerning but likewise predictable.
Fees were the biggest culprit lowering returns for DC plans which tend to invest more in mutual funds which have higher costs than collective trusts and other institutional funds that carry lower fees because of economies of scale. In addition, DC investors held more equities which also charge higher fees than bonds, for example, and performed well in the 1990s but not so well in the 2000’s due to the Great Recession.
Lower returns by IRAs were also caused by fees according the CRR’s analysis but also because a higher percentage of investors were invested in low interest bearing accounts like Money Market Funds. As money moves from DB to DC to IRAs, the lower returns are alarming. DB plans are professionally managed; DC plans are managed by individual investors but many have help through an advisor servicing their plan and companies oversee the selection and monitoring of funds enjoying better pricing. The recent DOL rule focused on the definition of fiduciary is clearly aimed at providing IRA investors with better protection by making more of the advisors act as a fiduciary. It looks like IRAs are the next frontier for regulators and, based on returns, it looks like investors need more and better help.
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