Rates of return for professionally managed traditional pension plans outpaced
those for employee-directed 401(k) plans in 2000 through 2002, the nation's
most recent bear market, according to an analysis by the human resources consulting firm Watson Wyatt.
This reversed the trend of the prior three years --
1997 to 1999 -- when 401(k) plans achieved higher returns than traditional pension plans.
The Watson Wyatt analysis found that defined benefit (DB) plans and employer-sponsored 401(k)
plans both performed poorly in each of the three years from 2000 to 2002 due
to the declining stock market. DB plans, however, outperformed 401(k) plans
in all three years--by 4.28 percentage points in 2000, 3.48 percentage points
in 2001, and 3.83 percentage points in 2002. The year 2001 marked the first
time both plans declined in the same year since the analysis was first conducted
"It's not surprising to see DB plans outperform defined contribution plans
during bear markets, or at least in slumping markets that follow sustained,
record-setting bull markets," said Sylvester Schieber, an economist and
director of research and information at Watson Wyatt. "While 2000 through
2002 were bad investment years for everyone, DB plans didn't slip as far as
401(k) plans partly because the professionals who manage them have a fiduciary
duty to diversify investments. 401(k) participants, meanwhile, may have over-invested
in stocks and experienced significant losses when the market started falling
The Watson Wyatt analysis also found that, in each of the three years from
2000 to 2002, 401(k) plans sponsored by larger employers earned higher rates
of return than smaller plans. This is consistent with the results of earlier
analyses conducted through most of the 1990s. "Historically, larger plans
offer more investment options. Since participants in large plans tend to have
more diversified portfolios than do employees in smaller plans, they are not
hit as hard by a market slump," said Schieber.
"Our research underscores the importance of DB plans in building secure
and stable retirement income," said Schieber. "But with or without
a DB plan, 401(k) participants would be wise to maintain a well-diversified
portfolio in order to weather market fluctuations more smoothly."
The analysis, the latest in an ongoing series by Watson Wyatt, was based on
the most recently available data from Form 5500 filings of more than 2,000 publicly
traded U.S. companies. Only companies that sponsor one DB and one 401(k) plan
were included. A more detailed discussion of this analysis is available at www.watsonwyatt.com.