As reported by P&I, defined contribution plans consistently underperform defined benefit plans, most likely due to higher investment fees, said a new research brief issued Tuesday by the Center for Retirement Research at Boston College. The report covered the period 1990-2012.
The BC report cited investment fees, which typically account for 80% to 90% of total expenses, as the most likely reason for DC plans’ underperformance as DC plans invest mainly through more expensive mutual funds and DB plans invest through other vehicles such as separate accounts and / or less expensive commingled trusts.
We would also suggest that a big reason for the underperformance of DC plans relative to DB plans is the reliance on the individual in the DC plan to handle this responsibility relative to professional management of DB plans.
Unfortunately, the report also found that individual retirement accounts (IRAs), which now hold more assets than DB or DC plans, produced even lower returns than DB or DC plans.
The report was based on a review of Investment Company Institute data and Form 5500 filings, which found that IRAs returned an average 2.2% per year between 2000 and 2012 , compared to 3.1% for defined contribution plans and 4.7% for defined benefit plans.
A DC plan account owner would have earned an additional $85,777 (on a beginning balance of $100,000) or 42% more by achieving a 4.7% return versus the 3.1% achieved on the average DC plans during this 23 year time frame.
The research report was written by Alicia Munnell, director of the Center for Retirement Research; Jean-Pierre Aubry, associate director of state and local research at the center; and Caroline Crawford, a research associate at the center.
The full report is available on the center’s website.