If you’ve been reading this blog for a while, then you know that defined benefit pensions are superior to defined contribution 401(k)’s. Defined benefit plans pool risk collectively, optimize investment decisions, and are professionally managed with low fees. Pensions also offer the security of a guaranteed monthly payment for life. In a 401(k) plan, individual workers must manage their investment decisions and are exposed to the whims of the market. To add to the growing literature on this subject, a new report from the Center for Retirement Research at Boston College shows how defined benefit plans outperform defined contribution plans on investment returns.
The researchers from CRR looked at the returns from defined benefit pensions and 401(k)’s. They found that from 2000-2012 pensions generated higher annual returns than 401(k)’s: 6.6% versus 5.9%. That 0.7% difference may not sound like a lot, but the researchers estimate that a worker who contributes to a 401(k) over a 40 year career will have about 15% less in assets at retirement.
One of the main reasons for the poor performance of 401(k)’s is high management fees. Individuals saving for retirement through 401(k)’s pay higher fees than professionally managed pensions. “The higher fees would be fine if they were getting double the return, but the performance is actually worse. It’s like, ‘What are you paying for?’ ” said Jean-Pierre Aubry, a co-author of the report.
401(k)’s have failed the middle class and contributed to a looming retirement crisis. Working families deserve a retirement system that honors their hard work and commitment to saving for retirement. As the authors say in the report: “Saving is too hard to have fees eat up such a large portion of investment earnings.”