Defined Contribution Outperforms Defined Benefit in Latest DOL Report

Samuel Adams Statue Boston

DC plans like 401(k)s significantly outperformed DB plans in the latest release of the 5500 forms with analysis by Russell Investments. In 2013, DC plans rose 17.9% compared to 11% for DB plans which was the second time in 15 years that DC plans outperformed DB plans and by the largest margin in 24 years according to Russell.

Because DC plans tend to have a higher allocation in equities than their DB counterparts, 2013 was the perfect storm with equities gaining 33.6% according to the Russell 3000 while bonds lost 2.0%.

But over a longer period, DB has outperformed DC plans – from 1992-2013, DB plans realized gains of 8.0% compared to 7.4% for DC plans and 1% lower for IRAs. According to Boston College’s Center for Retirement Research, the main reason is fees. Because DB plans generally have larger pools of money, they can command lower prices.

But assets in DC plans and IRAs dwarf those in DB plans as Americans shift from a world where the government and companies manage retirement assets and risk to a world where individuals have to decide how much to save, where to invest and how to make the money last a lifetime, which is getting longer.

Fees are coming down in DC plans thanks to transparency, competition and more savvy buyers. If the President’s recent push to make MEPs (multiple employer plans) more available goes through along with the many state initiatives to make retirement plans accessible for smaller companies, then fees for these larger pool of assets managed by professional managers will continue to decrease. No doubt that professionally managed investments like Target Date Funds have also helped not just with fees but with a more balanced asset allocation which translates into better long term results.

All eyes are on IRAs now with the DOL’s conflict of interest rule moving ahead as the OMB reviews the reg which could bring more transparency and greater oversight into a market that, relative to DC plans, is largely unsupervised.

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