US - Professionally managed tradition pension plans outpaced employee-directed 401(k) plans based on rates of return in 2000 through 2002, the nation's most recent bear market, analysis by Watson Wyatt has found.
This reversed the trend of the prior three years – 1997 to 1999 – when 401(k) plans achieved higher returns, Watson Wyatt said.
According to the analysis, defined benefit plans and employer-sponsored 401(k) plans both performed poorly in each of the three years from 2000 to 2002 due to the declining stock market. DB plans, however, outperformed 401(k) plans in all three years (2000, 2001 and 2002) by 4.28%, 3.48% and 3.83% respectively.
“It’s not surprising to see DB plans outperform defined contribution plans during bear markets, or at least in slumping markets that follow sustained, record-setting bull markets,” said Sylvester Schieber (pictured), economist and director of research and information at Watson Wyatt.
“While 2000 through 2002 were bad investment years for everyone, DB plans didn’t slip as far as 401(k) plans partly because the professionals who manage them have a fiduciary duty to diversify investments. 401(k) participants, meanwhile, may have over-invested in stocks and experienced significant losses while the market started falling in 2000.”
The analysis also found that in each of the three years from 2000 to 2002, 401(k) plans sponsored by larger employers earned higher rates of return than smaller plans.
“Historically, larger plans offer more investment options,” Schieber said. “Since participants in large plans tend to have more diversified portfolios than do employees in smaller plans, they are not hit as hard by a market slump.
The Watson Wyatt research was based on the most recently available data from Form 5500 filings of more than 2000 publicly traded US companies. Only companies who sponsor one DB and one 401(k) plan were included.
This week's edition of Professional Pensions is out now.
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