Retirement Roulette

The decline of defined-benefit plans and the growth of 401(k)-style defined-contribution plans has been widely reported. In 1996, both types of plans held roughly the same total assets, give or take a few billion (see chart, below). By 2007, defined-contribution plans held $3.73 trillion—oustripping defined-benefit plans by more than a trillion, according to a recent study by the Employee Benefit Research Institute.

Despite the shift, those plans at first glance appear to have performed similarly during the current market decline. The EBRI study appears to shows that the market hurt defined-benefit and defined-contribution plans equally in 2008 — both fell by 28%, while individual retirement accounts (IRAs) fell 24%.

But aggregate numbers don't tell the whole story, says EBRI Senior Research Associate Craig Copeland. Defined-benefit and defined-contribution plans are similar in terms of overall asset allocation, he says, so they appear to behave similarly when the market moves.

But in employee-led defined-contribution plans and IRAs, says Copeland, "you get more much more variation in what happens at the individual level." While defined-benefit plans tend to remain within a 10% band across most plans, he says, "variation on the individual plans is very large."

Indeed, when the stock market does well, says Copeland, "DC plans have typically outperformed DB plans." But that, too, he says, is the result of individual outliers — workers whose entire portfolio is invested in equities during boom times tend to skew the average performance of the plans upward.

As the nation continues to move away from the concept of a regular retirement pension and toward individual management of retirement savings, that means there will be increasingly big winners — and big losers — among retirees. "It is not clear what the percentage is going to be or how many are going to be worse off," says Copeland.  

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