Defined benefit plans better prepare workers for retirement through higher returns than defined contribution plans, according to a brief from the Center for Retirement Research at Boston College.
The brief compared returns by plan type from 1990 through 2012, using data from the U.S. Department of Labor’s Form 5500.
During that period, it said, DB plans “outperformed 401(k)s by an average of 0.7 percent per year, even after controlling for plan size and asset allocation.”
Individual retirement accounts (IRAs) performed even worse than DC plans, it found.
Through analysis, researchers determined that the poor returns of both DC and IRA plans were not due to individuals’ often-reported poor showing in investing their own money.
Instead, the report pointed at the higher fees charged DC accounts as the factor that drove returns down.
“Investment fees, which typically account for 80–90 percent of total expenses, are the most likely reason that DC plans earn lower returns than DB plans,” the brief said, because DC plans’ heavy reliance on mutual funds result in fees “for selecting the stocks and undertaking the research that leads to buy and sell decisions.”
Those fees are then typically charged as a percentage of invested assets and come out of account holders’ investment returns.
DB plans are also charged some investment fees. However, the study said, those fees are “small compared to those associated with DC plans.”
Since the assets in IRA accounts now exceed holdings in either DB or DC plans, largely due to rollovers from employer-sponsored plans, the brief said, that “implies trouble ahead given the massive amount of money that is being rolled over into IRAs.”
Data from the Investment Company Institute indicated that IRA returns are running approximately one percent lower than returns in DC plans. And that return, the brief concluded, “will have a substantial impact on [IRA holders’] retirement security.”
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