Pensions Outperformed 401(k) Plans During Last Bull Market, Watson Wyatt

WASHINGTON, D.C., June 18, 2008 — Rates of return for defined benefit (DB)
pension plans outpaced those for employee-directed 401(k) plans during the
most recent bull market from 2003 to 2006, according to an analysis by
Watson Wyatt Worldwide, a leading global consulting firm.

The comparison of investment rates of return between DB and defined
contribution (DC) plans found that DB plans outperformed 401(k) plans by
1.7 percentage points in 2003, 2.0 points in 2004, 1.1 points in 2005 and
1.6 points in 2006. Overall, from 1995 through 2006, DB plans outperformed
DC plans by an average of about 1 percentage point per year over this
12-year period. This would translate into a cumulative dollar difference of
nearly 14 percent for money invested at the start of the period.

“Achieving consistently high investment returns in volatile financial
markets is challenging, but it’s not surprising that, over time, DB plans
have outperformed DC plans,” said Alan Glickstein, a senior retirement
consultant at Watson Wyatt. “The professionals who manage pension funds
have considerable financial education, experience and discipline as well as
access to sophisticated investment tools. These advantages, coupled with a
much longer investment time horizon, help DB plan sponsors maximize their
returns and maintain well-diversified portfolios for the benefit of the
plan participants.”

Asset-Weighted Median Rates of Return for DB and 401(k) Plans

Year Defined Benefit Plans 401(k) Plans Differences in
Median Rates
2006 12.9% 11.3% 1.6%
2005 7.7% 6.7% 1.1%
2004 11.8% 9.8% 2.0%
2003 21.4% 19.7% 1.7%


Difference may not be exact due to rounding.

The Watson Wyatt analysis also found that between 1995 and 2006 larger
retirement plans — both DB and DC — realized investment returns higher than
those of smaller plans. Over this period, the largest one-sixth of the
analyzed DB plans outperformed the smallest one-sixth by approximately 3
percentage points, compared with a difference of about 0.7 percentage
points between the investment returns of the largest and smallest 401(k)
plans.

Size influences the performance of DB plans more than it affects DC plans
because larger pension plans can hire more expertise to manage assets,
while 401(k) plan participants still choose their own investments and have
access to similar investment options regardless of plan size.

“Individual participants in DC plans have more volatile asset allocations
over time as well as a greater range of investment returns, both positive
and negative, even within the year,” said Mark Warshawsky, director of
retirement research at Watson Wyatt. “In an environment where more and more
employees have access only to a DC plan, this research underscores the
important and continuing role DB plans play in providing efficient and
secure retirement benefits.”

The analysis, the latest in an ongoing series by Watson Wyatt, is based on
Form 5500 financial and pension disclosure data released by the U.S.
Department of Labor. Only companies that sponsor one DB plan and one 401(k)
plan, each with at least 100 participants, are included in the data
reported here. A more detailed discussion of this analysis can be found at
www.watsonwyatt.com/DBvsDCinvestmentreturns.

About Watson Wyatt

Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the
world’s leading organizations on people and financial issues. The firm’s
global services include: managing the cost and effectiveness of employee
benefit programs; developing attraction, retention and reward strategies;
advising pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance and
financial services companies; and delivering related technology,
outsourcing and data services. Watson Wyatt has 7,000 associates in 32
countries and is located on the Web at www.watsonwyatt.com.

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