Pension plans beat 401(k) savers—again

[marmar]

(MarketWatch) Every year, human-resources consultancy Towers Watson does a study comparing the investment performance of defined-benefit pension plans to the performance of defined-contribution (DC) plans like 401(k)s. The pension plans outperform 401(k)s most years (11 times out of the last 12, in fact) but the results for 2011 (the most recent year available) were, um, special.

As Towers Watson reported this week, the median pension plan outperformed the median 401(k) that year by almost 3 percentage points, gaining 2.74% while the average DC plan was down by 0.22%. That, says Towers Watson, was the widest margin since the company started tracking the data since 1995. (The average margin over that stretch was 0.76%.) And 401(k) investors like your Encore editor are left to wonder just what we did wrong.

The short answer is: As a group, we stayed in stocks. Thanks mostly to an ugly summer swoon, stocks were essentially flat in 2011. But prices of long-term bonds – which pensions rely on, but relatively few individual investors own – soared as interest rates dropped. And as Towers Watson notes, DC investors held a bigger share of their portfolios in stocks than pensions did in every year from 2006 to 2011. (For 2011, stocks made up 62% of DC plan portfolios and just 48% of pension portfolios.) Since the beginning of 2012, the S&P 500 is up more than 30%, with an 11% gain in calendar 2012, so it’ll be interesting to see what the next head-to-head report shows.

Fees also figure into the most recent results – and, indeed, play into the long-term losing streak of 401(k) investors. In 2011, 48% of assets in 401(k) and other DC plans were held in mutual funds, compared with only 14% of pension assets; Towers Watson estimates those fees shaved about 0.31% off of DC plans’ returns, making the difference between a gain and a loss for the year. (Pension funds face investment expenses, too, of course, but their enormity often means they pay much less.) ......................(more)

The complete piece is at: http://blogs.marketwatch.com/encore/2013/05/24/pension-plans-beat-401k-savers-again/

[earthside]

1. 401Ks are a retirement disaster for Americans.

It is simple.

The average working person is in absolutely no position to be managing a high stakes investment portfolio like a 401K.

Of course, businesses and governments love shoving this responsibility off onto their workers.

When the bulge of baby boomers gets into to retirement, this country is going to be in a heap of trouble because they don't have enough money to live on.

Social Security benefits are going to have to be at least doubled in the next fifteen to twenty years or else we are going to have tens of millions of old people too poor to live anywhere but on the streets (or in their kids basements).

[marmar]

2. "or in their kids basements"

That's if their kids aren't too poor to have basements.

[earthside]

3. Yup. n/t

[doc03]

4. Many of the lucky few to have defined benifit pension plans

have also been screwed out of them by being bought out. I have a defined benfit plan myself
and was offered $108,000 for it the year before I retired. My pension pays me $1320 per month but if I would have took the buy out I could have purchased an anuity paying around $650 per month. In most casses workers will grab the buy-out. I know several that did and most of them that took the cash spent most of the money on a car or something and put little or nothing in an annuity. I am living quite well on my retirement while many of my co-workers are struggling on SS alone.

[Kolesar]

5. Pension plans use a way different formula than does annuities

Pension plans must follow federal guidelines for the lump sum vs. annuity calculations. Annuities from an insurance company are more expensive to by because they are priced in the market and somebody has to make a profit on them.

The best deal is by deferring Social Security pensions as long as you can if you can. SS is indexed for inflation and the payout is increased 8% for every year you wait to collect past your "normal retirement age", which for me is 67. I will pay my own living expenses for three more years and in returned be assured of having plenty of money to pay for my expenses and indulgences for the rest of my life.

I do like immediate annuities, though, and plan to buy at least one.

[doc03]

7. It's easy to say work till you are 67 and you get more SS. Unfortunatly

my job quit me at 61 and in additon if you work in a steel mill environment you are lucky to make it to 62. So in my case I would have taken my retirement at 62 regardless. Also you are not ahead in your total SS payments by deferring retirement unless you live to be over 77 years old. Of course everyones situation is different I receive a faily good pension in addition to SS and I was supposed to receive employee health insurance until I was 65 so I was able to quit early. They dropped my insurance the last 7 months but fortunatly I got HCTC that paid 72.5% of it.

[Kolesar]

9. My mother was paying premiums for her USX Medigap policy for 28 years and they dropped her

She made modest use of the insurance. Now that she is 81 and needing some serious medical coverage, they took the program away.
**
The best use of SS timing is not to "break even", but to not run out of money in retirement. In my mother's case, instead of trying to get by on $13,000/year, she should have delayed the start of SS and had a pension up to 40% bigger. She would have had to get by on savings for those few years. She had some IRAs and CDs that she hung on to and watched them barely grow. They don't produce anything like the extra $5000 of an inflation-index pension from SS that she could have been receiving.

[byeya]

6. I am surprised it's this close.

[Incitatus]

8. Didn't Hostess siphon from their employees pension plan during their BK?

At least in 401k(k) the money is yours. It's at the mercy of the market and your investment options are limited, but there are pros and cons for both.