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WASHINGTON, DC, November 22, 2004 — Rates of return for professionally managed traditional pension plans outpaced those for employee-directed 401(k) plans in 2000 through 2002, the nation’s most recent bear market. This reversed the trend of the prior three years — 1997 to 1999 — when 401(k) plans achieved higher returns than traditional pension plans, according to an analysis by Watson Wyatt.

The analysis found that defined benefit (DB) plans and employer-sponsored 401(k) plans both performed poorly in each of the three years from 2000 to 2002 due to the declining stock market. DB plans, however, outperformed 401(k) plans in all three years — by 4.28 percentage points in 2000, 3.48 percentage points in 2001, and 3.83 percentage points in 2002. The year 2001 marked the first time both plans declined in the same year since the analysis was first conducted in 1990.

Median Rates of Return for Defined Benefit and 401(k) Plans

	Defined Benefit Plans	401(k) Plans	Difference in Median Rates
2000	0%	-4.28%	4.28%
2001	-3.82%	-7.30%	3.48%
2002	-8.43%	-12.26%	3.83%

“It’s not surprising to see DB plans outperform defined contribution plans during bear markets, or at least in slumping markets that follow sustained, record-setting bull markets,” said Sylvester Schieber, an economist and director of research and information at Watson Wyatt. “While 2000 through 2002 were bad investment years for everyone, DB plans didn’t slip as far as 401(k) plans partly because the professionals who manage them have a fiduciary duty to diversify investments. 401(k) participants, meanwhile, may have over-invested in stocks and experienced significant losses when the market started falling in 2000.”

The Watson Wyatt analysis also found that, in each of the three years from 2000 to 2002, 401(k) plans sponsored by larger employers earned higher rates of return than smaller plans. This is consistent with the results of earlier analyses conducted through most of the 1990s. “Historically, larger plans offer more investment options. Since participants in large plans tend to have more diversified portfolios than do employees in smaller plans, they are not hit as hard by a market slump,” said Schieber.

“Our research underscores the importance of DB plans in building secure and stable retirement income,” said Schieber. “But with or without a DB plan, 401(k) participants would be wise to maintain a well-diversified portfolio in order to weather market fluctuations more smoothly.”

The analysis, the latest in an ongoing series by Watson Wyatt, was based on the most recently available data from Form 5500 filings of more than 2,000 publicly traded U.S. companies. Only companies that sponsor one DB and one 401(k) plan were included. A more detailed discussion of this analysis is available by clicking here.

About Watson Wyatt Worldwide

Watson Wyatt is one of the world’s leading human capital consulting firms. We provide services in the areas of employee benefits, human capital strategies and related technology solutions. The firm is a global alliance between U.S.-based Watson Wyatt & Company, a publicly traded company (NYSE: WW), and U.K.-based Watson Wyatt LLP, a privately held, limited-liability partnership. Together the companies operate as Watson Wyatt Worldwide, with more than 6,000 associates in 88 offices in 30 countries. Corporate offices are in Washington, D.C., and Reigate, England.

Contact

Ed Emerman, 609-452-5967, eemerman@eaglepr.com
Ben Taylor, 202-715-7550, benjamin.taylor@watsonwyatt.com