Every so often a report comes along that says less about retirement policy than it does about the temptation to reduce complex issues to a simplistic scoreboard — that fits a particular agenda.
Even if it amounts to jamming a square peg into a round hole.
Now, there are plenty of reasons to approach the introduction of private markets to defined contribution plans with caution — and that was before the recent Labor Department proposal.[i] But any credible retirement plan professional understands that defined benefit and defined contribution plans have COMPLETELY different timeframes, objectives, and risk factors to consider. Comparing their returns[ii] without acknowledging those differences is a bit like comparing the performance of a fire department and an ambulance service based solely on fuel efficiency.
Technically measurable? Sure.
Useful? Not so much.
The report headlines with an assertion that DC plans’ “superior performance was a result of the defined contribution plans’ simpler portfolio mix, and the outperformance holds even when controlling for plan size and risk.”
Yes, but. Defined contribution plans are accumulation vehicles. Their objective is largely straightforward: maximize participant account growth over time, subject to participant behavior and investment elections. Particularly over the past 15 years — a period dominated by one of the strongest public equity runs in modern history — that has proven to be a very favorable environment for equity-heavy portfolios. Oh, and they’re under the direction of millions of different individual savers, with widely divergent interests, needs, expertise and — attention spans.
To put it mildly, defined benefit plans operate under a different mandate entirely.
They aren’t simply trying to maximize returns. They are trying to ensure that promised benefits can actually be paid — not just next quarter, but decades into the future. That means managing liabilities, liquidity needs, funded status volatility, cash flow demands, and demographic realities. Mature pension plans with large retiree populations often must maintain substantial allocations to fixed income and diversifying assets precisely because they have obligations that continue regardless of what the markets are doing.
And that, ironically enough, was once considered a virtue (see Goal Lines).
For years, many of the same voices now criticizing pension plan allocations celebrated the advantages of defined benefit investing: professional management, institutional discipline, diversification, long-term investing, risk pooling, and access to asset classes unavailable to most individual investors.
Pension plans were often held up as examples of how retirement investing should work — insulated from participant panic, emotional trading, and the limitations of retail investing. To this day many industry experts promote shifts toward the DB-ification of DC plans.
Now, after a prolonged bull market in public equities, the narrative has, apparently, shifted.
Suddenly, diversification is evidence of caution. Liability management is evidence of underperformance. And 401(k) plans — once criticized for placing too much responsibility and risk on individual workers — are being celebrated for the very market exposure that once made them suspect.
Funny how market cycles can reshape philosophy.
The report’s comparison period also matters. Measuring outcomes beginning in 2009 effectively captures nearly the entirety of the post-financial crisis equity surge. In hindsight, portfolios with heavier public equity exposure were almost destined to look superior over that period.
Then again, hindsight has always been the easiest investment strategy.
None of this is to argue that pension plans are beyond criticism, or that alternative investments always justify their fees or complexity. Reasonable people can debate those questions — and should.
But treating pension plans and 401(k)s[iii] as though they are interchangeable investment products competing for quarterly bragging rights misses the larger point.
Let’s face it — the gap in investment returns may well have something to do with the allocation to private market investments at a particular point in time. But the commonsense conclusion is that the real explanation goes so far beyond that that the comparison is … ludicrous. One can only imagine that those resharing the headline of this particular report seem only to care about the conclusion it draws, rather than the arguably shaky foundation upon which it was based.
The real issue here isn't whether the square peg or the round hole is somehow superior. It's the insistence on forcing one into the other and then declaring victory even when the fit looks awkward.
Sometimes a square peg is supposed to be square. And sometimes the problem isn't the peg at all — it's who’s holding the hammer — and why.
- Nevin E. Adams, JD
[i] Which, for my money, mostly reminds us just how complicated and fraught with concerns that process is. See Talking Points: Retirement Income, Defaults and Fiduciary Duty.
[ii] Not to mention blurring the potential distinctive differences between all the defined benefit plans and all the various defined contribution plans that are being aggregated together to get those (gulp) AVERAGE results.
[iii] Not to mention the vast array of plan types being “mushed” together to derive these conclusions: “Using complete Form 5500 filings for all open U.S. private sector defined benefit plans and all defined contribution plans (over 58,000 plans, $7.7 trillion in combined assets) between 2009 and 2024, and incorporating verified return data for U.S. state and local public pension systems from the Public Plans Database…”
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