Watson Wyatt Finds DB Plans Still On Top

January 14, 2002 (PLANSPONSOR.com) - The performance of employee directed defined contribution plans lagged defined benefit plans by about 1% per year between 1990 and 1998, a new survey by Watson Wyatt finds.

However, the study notes that while defined benefit plans realized larger returns than 401(k) plans through 1995, 401(k) plans made a comeback in 1997 and 1998, overtaking defined benefit plan returns by 2% each year.

According to the data, larger plans fared better than smaller plans, regardless of whether the plans were defined benefit or 401(k), primarily because larger plans have more access to investment options and expertise.

Still, the survey found that the average rate of return for the largest one-sixth and largest one-half of the plans varied by about 1% at 17.5% and 16.7% respectively. For all plans, the rate of return hovered around 15%.

From 1995 to 1998, the median difference between defined benefit plan returns and 401(k) plan returns was close to zero. In contrast, five years earlier in 1990, 75% of the plan sponsors surveyed experienced higher returns on their defined benefit plans than on their 401(k) plans.

Historical Data  

In detail, over the four year period between 1995 and 1998:

  • one out of 10 of the sponsors surveyed saw their defined benefit plan outperform their 401(k) plan by nearly 6.6% or more
  • 10% of the sponsors surveyed earned 7.7% less on their defined benefit plans than on their 401(k) plans.

Between 1990 and 1995:

  • a tenth of the sponsors saw a 5% higher average return on their defined benefit plan compared than for their 401(k) plan
  • while a further 10% of sponsors saw returns on their defined benefit plans that were nearly 2% lower than those for their 401(k) plans.

DC Plans Only

Watson Wyatt also surveyed benefits administrators who sponsored only defined contribution plans.

In these scenarios, large 401(k) plans outperformed small plans. But, rates of return for 401(k)s were higher when sponsors offered a defined benefit plan as well.

This suggests that participants tended to aggressively invest in their 401(k) plans knowing that they had their defined benefit plans to fall back on in the event that their investments do not reach fruition, the study said.