Godwin, Morris, Laurenzi & Bloomfield, P.C.

In the "Study Says !!! Department..." 401(k)s Vs. Pensions: Pensions Do Better

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by   Samuel Morris               Godwin Morris Laurenzi Bloomfield

50 N. Front St., Memphis TN  38103

901 528 1702    901 949 1144

In the "Study Says !!! Department..." 401(k)s Vs. Pensions: Pensions Do Better

 

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401(k)s Vs. Pensions: Pensions Do Better





Whoever said choice was a good thing?


Workers who still have a guaranteed pension are getting better returns than employees who have to make their own choices about retirement.

Private-sector pension funds produced annual returns that were 0.7% higher than employees' 401(k) plans from 2000 to 2012, according to a new analysis by Boston College researchers.

A significant portion of the American workforce in recent decades has been shifted off of defined-benefit pensions and into 401(k) accounts. Pensions offer a guaranteed payout for life, whereas 401(k) funds aim to leave workers a large pool of assets when they retire.

Few studies have directly compared how well workers have done making their own investment choices versus the returns generated by the professional investment staff employed by corporate pension funds. For the study, Boston College researchers looked at the retirement benefits for 117 million participants in 73,000 pension and 401(k) plans with combined assets of $5.4 trillion.

The conclusion: pensions produced returns of 6.6% for the 12 years analyzed by Boston College, versus the 5.9% seen among defined-contribution, or 401(k), plans.


"The higher fees would be fine if they were getting double the return, but the performance is actually worse. It's like, 'What are you paying for?' " said Jean-Pierre Aubry, an assistant director at the Center for Retirement Research at Boston College, and a co-author on the study.


One drag on 401(k) performance: high fees. Mutual funds collect fees to select stocks and conduct market research--and those expenses add up, Boston College researchers warn. Pensions, which manage a much larger pool of assets than an individual 401(k) account, are able to negotiate better terms with outside money managers than workers can with mutual funds.

Company pensions generally pay around 0.7% of assets under management to its external money managers, Mr. Aubry said. But individual workers are paying closer to 0.8% in fees in their 401(k) plans, if not 2% or more, for the costliest strategies, according to the Boston College report, which analyzed Investment Company Institute data.

"Saving is too hard to have fees eat up such a large portion of investment earnings," according to the report.

 

Link to Study:

 

                   http://crr.bc.edu/wp-content/uploads/2015/12/IB_15-21.pdf

 

 

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50 N. Front St., Memphis TN  38103

901 528 1702    901 949 1144

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