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January 02, 2007
Defined Benefit Investments Outperform 401(k) Funds

In the current environment of eliminating or reducing benefits under traditional defined benefit plans, the Center for Retirement Research at Boston College performed a study on how the investments in both kinds of plans are faring. The news isn't good.

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According to the Center's September 2006 Issue Brief, the question was whether or not returns on 401(k) plans, which are invested by the participants, are higher than those in defined benefit plans, which are invested by the plan.

The survey looked at rates of return from 1988 through 2004. During the studied period, defined benefit plans outperformed their defined contribution counterparts by one percentage point. Interestingly, the result was in spite of the fact that more 401(k) money was held in equities during the bull market of the late 1990s.

The report speculates that higher fees, deducted before rates of return are reported to participants, may be partly responsible. Even worse, the Center found that more than half of 401(k) participants neglect to diversify their investments, as is considered prudent investment strategy.

The Center also discovered that individual retirement accounts or IRAs, which are receiving what the report calls massive amounts of money, fared even worse, with rates of return lower than either kind of employer-sponsored plan.

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