Traditional Pension Plans Outperform 401(k)s

By Staff Report

Nov. 23, 2004

The rates of return for professionally managed traditional pension plans beat out the returns of employee-controlled managed 401(k) plans from 2000 through 2002, according to Watson Wyatt.

By contrast, 401(k)s outpaced traditional pension, or defined-benefit, plans from 1997 to 1999.

Both styles of retirement plans did poorly during the declining stock market, but defined-benefit plans didn’t lose as much money. In 2002, for example, 401(k)s declined by about 12.3 percent, while defined-benefit plans dipped about 8.4 percent.

Sylvester Schieber, director of research and information at Watson Wyatt, notes that the professional managers running the traditional plans may have diversified their investments more. Employees, on the other hand, may have loaded up on high-risk, high-reward stocks that sometimes perform very well during bull markets and very poorly during bear markets.

“The results probably suggest that employers should be communicating with their workers not only periodically about appropriate allocations and diversification of assets, but they ought to remind people that in order to fulfill the (investment) strategies they’re trying to implement, they’ll have to adjust their portfolios from time to time,” Schieber says. “The folks who manage defined-benefit plans are rebalancing portfolios on a periodic basis. …They certainly have avoided the depth of the market downturn that was inflicted on defined-contribution participants because they weren’t doing that.”

Schieber says a typical employer puts about 50 percent to 60 percent of its retirement assets in stocks. Employers stick to it with discipline, so that when the market rises and they find themselves too heavy in stocks, they’ll sell off perhaps 5 percent to 10 percent. “In a strong bull market it acts as a damper on their return,” Schieber says, but in a bear market, the strategy can reduce losses.

Employees, meanwhile, might find themselves with 60 percent of their portfolio in stocks, and forgo any rebalancing, letting it become 65 percent or 70 percent as the market takes off. “You feel awfully good about that,” Schieber says, “but not when you go through a period like 2000 to 2002.”

Schedule, engage, and pay your staff in one system with