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DB Plans Outperform DC by Widest Margin Since 1995

LDI has been narrowing the performance gap overall, but long bonds proved to be a boon for defined benefit schemes in 2011.
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(May 23, 2013) – Defined benefit plans made a tidy 2.74% average return in 2011, while defined contribution pots were poorer by the year's end, down 0.22%.

This marked the largest performance gap between the two retirement savings structures since1995, according to Towers Watson, which released the data. The consultancy/asset management firm has been measuring this performance differential for the last 18 years.

"Since the beginning of our study, DB plans have consistently achieved better investment returns than DC plans, except during boom stock market years," said Towers Watson's Chris DeMeo, head of investment for the Americas. "However, the spread between the two has been narrowing, and with many sponsors adjusting the asset allocation strategy of their DB plans to better match assets to liabilities, the disparity may diminish further in the future." 

Liability-driven investing strategies in fact improved the DB sector's performance in 2011, however. As plan sponsors shifted assets from public equities to long bonds in an effort to better match duration, they also found far higher returns. 

Defined contribution allocations tend to be much heavier on stocks than DB portfolios are, which has previously lead to narrower performance gaps during bull markets. In 2011, equities made up an average 48% of DB assets, and 60% of the average DC portfolio, according to the study.  

Given stock markets' record-breaking performances since 2011, Towers Watson's Dave Suchsland, a senior retirement consultant, predicts that next year's study will show both DC and DB in the black.

"Given the strong performance of equities in 2012 and the declining interest rates that led to higher fixed-income returns, it's likely that our next analysis will show improvement in both DC and DB plan returns," Suchsland said. "With more DC plans assuming some DB plan characteristics…DC plan participants now have additional opportunities to improve the performance of their portfolios." 

Towers Watson's analysis is based on the Department of Labor's form 5500 financial and pension disclosures, which have been released through 2011. More than 2,000 firms sponsoring both DB and DC plans, each with at least 100 members, were included in the study.