It seems to defy investment logic, but defined contribution
plans, haphazardly run by amateurs, actually lost less money in
the recession than professionally managed defined benefit
plans, according to a new paper from the Urban Institute, a
Washington, D.C.based social and economic policy think
Not only that, but defined contribution plans are also doing
better during the recovery,
according to the paper.
Senior researcher Barbara Butrica found that traditional
private sector pension plans lost 37 percent of their assets,
or $1 trillion, from mid-2007 to 2009. Even after regaining
some of those losses in the following three years, they remain
about $4 billion below their $2.7 trillion peak.
By contrast, 401(k)s, individual retirement accounts, and
other defined-contribution-style vehicles lost only 31 percent
and have since bounced back so nicely that they are now about
$8 billion above their 2007 peak to a total $9.5
So what gives?
Part of the problem may be precisely the pension plans
sophisticated, professional investment strategies.
During the five-year period covered by the paper, says
Timothy Barron, chief investment officer for the consulting
firm Segal Rogerscasey, there was [investment] area after
area that would hurt defined benefit plans and not hurt defined
contributions as much.
For instance, he says that a typical defined benefit plan
might have 18 percent in alternative investments like private
equity, 14 percent in international equity, and 4 percent in
real estate investment trusts. Those were among the asset
classes that did worst during the downturn and still lag in
Meanwhile, in Aon Hewitts most recent survey of 120
large defined contribution plans, the typical portfolio was
just 5.6 percent in international and 0.4 percent in
specialty assets. Real estate was too small to
merit a separate breakout.
However, asset allocation is only part of the story. More
important may be the amount of money coming in and out.
Thanks to provisions like automatic enrollment now
offered by more than half of all defined contribution plans,
according to Aon Hewitt coupled with plain old inertia,
401(k)-type plans keep pulling in new assets through good
markets and bad.
The defined benefit pool, on the other hand, has been
shrinking, as companies freeze, close and terminate their
programs. Where 38 percent of the private workforce had a DB
plan in 1979, just 14 percent were covered as of 2011,
according the Employee Benefit Research Institute.
Yet even while the pension universe and assets stagnated,
the outflow only quickened, as boomers inexorably aged and
companies pushed employees into early retirement. Defined
benefit plans throughout the last five years have been making
billions and billions of dollars in payments to retirees,
says Diane Oakley, executive director of the National Institute
on Retirement Security, a think tank in Washington D.C.
Altogether, these demographic and design trends mean that
pension plans would probably be bleeding net assets even if the
markets boomed and, thus, that theres not much
managers could have done on the asset allocation front to make
up for those losses.
Her paper highlights the trend away from DBs toward
DCs, Butrica said in a follow-up interview.
Still, some pension managers have felt burned by their
aggressive asset allocation and shifted to more conservative
liability-driven models, which tie their holdings
usually bonds to their payout schedules.
Meanwhile, 401(k) participants are increasingly turning to
professionally managed and premixed portfolios, including
target date funds, which now are offered by 83 percent of
plans, according to Aon Hewitt. Those accounts tend to look a
lot more like defined benefit plans, with higher allocations to
international, real estate and private equity.
Maybe in the next downturn, theyll lose buckets of