Traditional pension returns outpaced 401(k) growth in every year between 1995 and 2008, according to a new analysis by Towers Watson. Both types of retirement plans lost value in 2008, but pensions still outperformed 401(k) plans by roughly 1 percentage point, the same percentage of higher returns pensions have averaged over the past decade.
The Towers Watson study of 79 companies with both a pension and a 401(k) and over 100 participants in each retirement plan found that while some pension plans in the study reported small positive returns in 2008, all 401(k) plans experienced average losses of at least 10 percent. Some 401(k) plans lost more than 40 percent of their value, more than any traditional pension in the study.
“Participants in 401(k) plans were less likely than defined benefit (traditional pension) plan sponsors to rebalance their asset portfolios while stock values ran up, leaving them more vulnerable to market declines,” says Mark Ruloff, a senior consultant at Towers Watson. “Many defined benefit sponsors had been reducing their exposure to equities and already shifted toward more conservative investment strategies in 2007, which helped to mitigate their losses.”
In both recent bull and bear markets pension returns beat 401(k) growth by 1 percent. Traditional pensions lost a median of 25.3 percent of their value in 2008, while 401(k)s typically lost 26.2 percent. An earlier Towers Watson study found that returns were better for both types of retirement plans in 2007, but pension growth still outpaced that of 401(k)s: Traditional pensions experienced a median return of 7.7 percent, while 401(k)s grew by 6.8 percent. “Defined contribution plans do not replicate all the advantages of defined benefit plans and are unlikely to outperform defined benefit plans, which generally have extended investment horizons and economies of scale,” says Mark Warshawsky, a senior retirement researcher at Towers Watson.