DB Plans Outperformed 401(k)s in 2000-2002 Bear Market

November 22, 2004 (PLANSPONSOR.com) - Defined benefit (DB) plans outperformed 401(k)s significantly from 2000 to 2002, when the bear market was at its worst, according to consulting firm Watson Wyatt.

This was a turnaround from previous years, in which 401(k) plans outperformed their more traditional counterparts. Starting in 2000 however, with the downturn of the market, the professionally managed accounts began to see better relative returns. In 2000, DB plans were stagnant, while 401(k) plans lost 4.28% on average. The following year, both plan types lost money, with DB plans posting a 3.82% loss and 401(k) plans tumbling 7.30%. 2002 was even worse for both plans, with DB plans losing 8.43% and 401(k) plans falling 12.26%.

Watson Wyatt analysts assert that the different performance figures during the bear market were a result of a DB plan manager’s fiduciary duty to diversify holdings. 401(k) investors may have over-invested in stocks during the down market, and suffered accordingly.

The firm also noted that 401(k) plans sponsored by larger employers performed better during the down market, most likely due to a wider array of investment choices that offered portfolio diversification. This is in line with historical trends, according to the company, which has been keeping track of such distinctions since the early part of the last decade.

The data provided by Watson Wyatt ( www.watsonwyatt.com ), is based on the Form 5500 filings of over 2,000 publicly traded domestic companies. Companies that sponsored more than one DB and/or 401(k) plan were excluded from the survey.