Investment returns in U.S. DB plans outperformed those in DC plans in 2011 by the widest margin since the mid-1990s.
The Towers Watson analysis of more than 2,000 plan sponsors found that DB plans had median investment returns of 2.74% in 2011, while DC plans had median returns of -0.22%.
The nearly three-percentage-point difference is the widest margin by which DB plans beat DC plans since 1995, when Towers Watson first analyzed the rates of returns for both plan types.
The analysis also found that, despite the large performance difference in 2011, the gap between DB and DC plans narrowed during the previous five-year period.
Since 1995, DB plans have outperformed DC plans by 76 basis points annually. But between 2007 and 2011, the difference shrank by nearly half to 39 basis points.
The smaller gap is mostly due to the stock market’s strong performance in 2009 when DC plans returned 20.86% while DB plans gained 15.46%.
“Since the beginning of our study, DB plans have consistently achieved better investment returns than DC plans, except during boom stock market years,” says Chris DeMeo, Towers Watson’s head of investment, Americas.
“However, the spread between the two has been narrowing, and with many sponsors adjusting the asset allocation strategy of their DB plans to better match assets to liabilities, the disparity may diminish further in the future.”
The analysis notes that performance in some DB plans was helped by sponsors shifting assets from equities to long-duration bonds in an attempt to better match the value of plan liabilities with respect to interest rate changes.
That move proved to be successful from a total investment return perspective as the performance of long-duration bonds topped equity markets in 2011.