Pension funds outperform those in 401(k) plans year after year, according to new research from consulting company Towers Watson.
In 2011, the last year studied, defined-benefit plans had median returns of 2.74 percent, while 401(k)s and other defined-contribution plans lost 0.22 percent.
Fueling the disparity, pension funds had loaded up on long-term bonds, while 401(k) investors were stock-heavy or were keeping more money in shorter-term and mixed-term bond funds.
Interest rates also fell significantly in 2011, with yields on 10-year Treasuries dropping from 3.36 percent to 1.89 percent. That boosted the value of the long bonds sitting in pension fund portfolios.
That doesn't mean individual retirement savers should drop everything and race into the bond market. Still, there are lessons to be learned by the two types of retirement plans' disparate returns.
The bigger the pool, the better the returns. Though 401(k) participants have to manage money so it is ready for their own retirement date, pension fund managers can always be investing for the long haul, as younger participants balance older ones. The study also found that bigger pension funds beat smaller ones, and that participants in large 401(k)s did better than participants in small plans.
The take-away? If you leave a large company, you might want to leave your money in the 401(k) plan instead of rolling it into an individual retirement account, suggests Dave Suchsland, a senior consulting actuary with Towers Watson.
Don't play follow the leader. In 2009, the stock market started to recover from its earlier implosion, and defined-contribution plans bested pension plans, the study said. During that year, 401(k) investors stuck with more stocks than did the pension fund managers, who started buying those long bonds. They did that to offset longer-term liabilities, says Suchsland, but it was also a strategy that paid off in 2010 and 2011, as interest rates fell.
Financial experts say we are now nearing the end of a three-decade-long bull market in bonds. It would be a mistake for 401(k) participants to follow pension fund managers into bonds now.
Don't rule out the return of pensions. Suchsland says he believes some employers who switched to defined-contribution plans in the past few decades may switch back because of pension efficiencies and "workforce issues." Put another way? Employers may not want to encourage another generation of boomer-like workers who feel like they have to keep working forever because their 401(k) savings are inadequate.