Study Finds that DB Plans Continue to Outperform DC Plans, but Gap Narrowing

Investment returns in defined benefit (DB) pension plans outperformed those in defined contribution (DC) plans in 2011 by the widest margin since the mid-1990s, according to a recent analysis by Towers Watson. However, the difference in 2011 investment results counters a recent narrowing of the gap between DB and DC plan performance.

The Towers Watson analysis of more than 2,000 plan sponsors found that DB plans had median investment returns of 2.74% in 2011, while DC plans had median returns of –0.22%. The difference is the widest margin by which DB plans outperformed DC plans since 1995, when Towers Watson first analyzed the rates of returns for both plan types, the firm said.

The analysis also found that despite the large performance difference in 2011, the gap between DB and DC plans narrowed during the previous five-year period. Since 1995, DB plans have outperformed DC plans by 76 basis points annually, but in the last five years for which data is available (2007 through 2011), the difference narrowed by roughly half, to 39 basis points, Towers Watson said. The smaller gap is mostly due to the strong stock market performance in 2009, when DC plans returned 20.86% while DB plans gained 15.46%. DB plans actually realized higher returns than DC plans in all other years between 2007 and 2011.

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A copy of the analysis is available here.