WASHINGTON May 22 Pension funds - those old
guaranteed-benefit retirement plans your grandma might have told
you about - outperform those in 401(k) plans year after year,
according to new research from consulting company Towers Watson.
In 2011, the last year studied, defined-benefit plans had
median returns of 2.74 percent, while 401(k)s and other
defined-contribution plans lost 0.22 percent. It was the widest
margin since the mid-1990s, the company said.
There are many reasons for that, but the primary one,
according to Towers Watson, is that by the time 2011 dawned
pension funds had loaded up on long-term bonds. Individual
401(k)investors, meanwhile, were stock-heavy or were keeping
more money in shorter-term and mixed-term bond funds. Interest
rates fell significantly that year, with yields on 10-year
Treasuries dropping from 3.36 percent to 1.89 percent. That
boosted the value of the long bonds sitting in pension fund
That doesn't mean individual retirement savers should drop
everything and race into the bond market. Nor does it mean that
it is in the power of individual savers to match pension fund
returns. Pension funds have the benefit of investing for a whole
pool of people; they can look longer term and take different
Still, there are lessons to be learned by the two types of
retirement plans' disparate returns. Here are some takeaways.
-- The bigger the pool, the better the returns. Pension
funds, which invest for large groups of people, can use
economies of scale several ways. They can buy investments
cheaper and can take bigger and different risks because not
everyone in the pool will retire at the same time. While 401(k)
participants have to manage money so it is ready for their own
retirement date, pension fund managers can always be investing
for the long haul, as younger participants balance older ones.
The study also found that bigger pension funds beat smaller
ones, and that participants in large 401(k)s did better than
participants in small plans.
The takeaway? If you leave a large company, you might want
to leave your money in the 401(k) plan instead of rolling it
into an individual retirement account, suggests Dave Suchsland,
a senior consulting actuary with Towers Watson. You still can't
take the kinds of risks a large pension fund might, but you can
take advantage of better deals on mutual funds.
-- Fees matter. Companies that offer pension funds tend to
pay the cost of the fund and not count those fees when reporting
investment returns. But 401(k) administrative expenses are often
buried in the fees that participants pay, and that lowers
returns. That difference alone gave pension plans a 0.66 percent
annual advantage over the last 17 years, Towers Watson reported.
You probably can't talk your boss into paying the whole cost of
the 401(k) plan, though that would be nice. But you can at least
make sure the funds you pick within your plan are the low-fee
-- Don't play follow the leader. In 2009 the stock market
started to recover from its earlier implosion, and
defined-contribution plans bested pension plans, the study said.
(The comparison was made on an asset-weighted basis; bigger
plans had heavier weightings in the calculations.) During that
year, 401(k) investors stuck with more stocks than did the
pension fund managers, who started buying those long bonds. They
did that to offset longer-term liabilities, says Suchsland, but
it was also a strategy that paid off in 2010 and 2011, as
interest rates fell.
Financial experts say we are now nearing the end of a
three-decade-long bull market in bonds. It would be a mistake
for 401(k) participants to follow pension fund managers into
-- Don't rule out the return of pensions. The bottom line of
the Towers Watson research is this, in Suchsland's words: "For a
plan sponsor to provide a certain level of benefit, it is
cheaper to finance through the defined-benefit plan." Even
though traditional pensions present more accounting
challenges(because they are carried on company balance sheets),
Suchsland says he believes some employers who switched to
defined-contribution plans in the past few decades may switch
back because of pension efficiencies and "workforce issues."
Put another way? Employers may not want to encourage another
generation of boomer-like workers who feel like they have to
keep working forever because their 401(k) savings are