Defined benefit (DB) plans like those administered by NYSTRS continue to outperform 401(k)-style defined contribution (DC) plans, according to a December 2015 study published by the Center for Retirement Research at Boston College.
The study also cautioned that the growing dependence on Individual Retirement Accounts (IRAs) as a primary source of income in retirement will have a “substantial impact” on long-term retirement security because IRA returns are significantly lower than those of DB or DC plans.
The brief, titled Investment Returns: Defined Benefit vs. Defined Contribution Plans, found that from 1990-2012, DB plans outperformed DC plans by 0.7% -- with the difference even greater since 2002. The likely explanation, according to study researchers, is higher fees associated with DC plans.
“Saving is too hard to have fees eat up such a large portion of investment earnings,” the study’s authors concluded. “Forgoing returns over long time periods means that assets at retirement will be sharply reduced.”
In 2014, median mutual fund fees ranged from 44 cents to $1.39 per $100 managed, according to Investment Company Institute data quoted in the Center for Retirement Research brief. By comparison, NYSTRS manages the same $100 for about 24 cents.
“Defined benefit plans consistently report higher returns than defined contribution plans,” study authors wrote. “Some researchers have suggested that the differential between…plan returns has declined over time, but the data show that the differential is generally larger after 2002.”
IRAs accounted for $7.4 trillion in retirement assets through 2014, compared to $3.1 trillion in DB plans. (DC plans accounted for an additional $5.4 trillion.) Researchers questioned the long-term impact of this imbalance.
“IRAs produce even lower returns than defined contribution plans, which implies trouble ahead given the massive amount of money that is being rolled over into IRAs,” brief authors concluded. “These lower returns mean that those who rely on IRAs will have substantially lower balances in retirement.”
A full copy of the brief is available from the Center for Retirement Research.