Comments on economics, mystery fiction, drama, and art.

Monday, September 11, 2006

The coming pension shortfall?

In a paper by Alicia Munnell Mauricio Soto, Jerilyn Libby, and John Prinzivalli, findings that suggest that defined-benefit pension plans out-perform 401(k)s or IRAs:

"The bottom line is that over the period 1988-2004 defined benefit plans outperformed 401(k) plans by one percentage point. This outcome occurred despite the fact that 401(k) plans held a higher portion of their assets in equities during the bull market of the 1990s. Part of the explanation may rest with higher fees, which are deducted before returns are reported to participants. But the one percentage point shortfall understates the investment problem in 401(k) plans, since an aggregate number does not reflect the fact that more than half of participants in 401(k) plans do not follow the prudent investment strategy of diversifying their holdings. Finally, the available data suggest that IRAs produce even lower returns than 401(k) plans, which, if true, implies trouble ahead given the massive amount of money that is being rolled over into these accounts."

This is a highly cautionary finding for those who propose a major movement from defined-benefit plans to defined-contribution plans. (Hat tips to Brad deLong and PGL at Angry Bear.)


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