Net returns in defined benefit pension plans were higher than net returns in defined contribution plans by an average of 0.46 per cent annually over the last 10 years, according to new research by CEM Benchmarking Inc.
That compares to the 1.8 per cent difference the last time the organization compared the performance, for the period between 1998 and 2005. “Our first study was all doom and gloom,” said Sandy Halim, a principal at CEM Benchmarking and lead author of the study.
“The warning message was: in 25 years, DC account values would be 34 per cent smaller than DB plans if they both started with the same dollar amount. Thankfully, our updated research shows that’s no longer the case, since plan sponsors made substantially improvements to their plans during the past 11 years.”
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One reason for the improved performance is the adoption of target-date funds as a default option in defined contribution plans, said Halim. In 2016, 84 per cent of defined contribution plans offered target-date funds as their default option, compared to just 30 per cent in 2007.
“Target-date funds, in particular, have exploded in popularity,” added Halim.
Asset mixes in defined contribution plans have also improved. In 1998, company stock, stable value and cash represented 44 per cent of defined contribution plans’ holdings, whereas by 2016, it had decreased to 25 per cent, according to the study. Despite the asset mix, defined contribution plan costs have remained the same, as they’ve embraced low-cost indexed options. More than half (58 per cent) of indexable assets were in passive options in 2016, up from 40 per cent in 1998.
Automatic enrolment has also increased since CEM Benchmarking’s last study. In 2016, 80 per cent of primary plans and 70 per cent of supplemental plans included automatic enrolment, compared to 62 per cent and 51 per cent, respectively, in 2007.
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