Study: 401(k)s, IRAs underperform pensions

Private 401(k) retirement-savings plans have underperformed traditional company pension plans by one percentage point a year, according to a Boston College report released yesterday that found individual retirement accounts fared even worse.

The findings of the review, which studied about 5,000 companies that sponsored both kinds of plans from 1988 to 2004, underscore the risks facing many workers as companies shed traditional pension plans in favor of vehicles such as 401(k)s.

In theory these plans offer more flexibility for modern workers who change jobs often, but some traditional financial advisers have argued that most people aren't as good at investing their money as pension plan professionals.

Those worries were supported by yesterday's report from Boston College's Center for Retirement Research. Its director, Alicia H. Munnell, acknowledged a one percentage point difference isn't significant in any particular year. ``But this is every single year, and if that were true over a person's 40-year worklife, they would end up with 20 percent less at retirement," she said.

Munnell and three co-authors also found that the individual retirement accounts, or IRAs, have turned in even worse performances than 401(k)s. Also there aren't enough tools to properly analyze their performance even though IRAs now account for a larger share of retirement savings than either of the other two vehicles.

If proven correct, the lower return for IRAs ``implies trouble ahead given the massive amount of money that is being rolled over into these accounts," wrote the authors.

Dallas L. Salisbury, chief executive of the Employee Benefit Research Institute, a Washington, D.C., group funded by plan providers, labor unions, and other organizations, said the findings were in line with other research in the area but not directly relevant to individual investors.

Salisbury also said the IRA figures weren't alarming since the biggest accounts tend to be held by older workers who want more conservative investments anyway.

Some managers are already addressing some of the issues raised in the report, such as a lack of diversity in the portfolios of many 401(k) participants. Jamie Cornell, senior vice president at Fidelity Investments, the Boston mutual-fund giant, said the company offers plans with features like funds tailored to a worker's age.

For their paper, the BC researchers compared returns of private retirement plans that hold a combined $8.4 trillion dollars -- $3.67 trillion in IRAs, $2.87 trillion in 401(k)s and similar ``defined-contribution" plans, and $1.92 trillion held by traditional pension systems known as ``defined-benefit" plans.

When adjusted for the size of their holdings, the defined-benefit plans returned 10.7 percent a year on average, compared with 9.7 percent a year on average for the defined-contribution plans. Also, using data from the Investment Company Institute, they estimated IRAs' average performance from 1998 to 2003 was 3.8 percent, compared with 6.6 percent for defined-benefit plans and 5.6 percent for 401(k) plans.

The authors speculate one reason the 401(k)s lag may be that fees tend to be higher for the plans, which typically put their money into mutual funds.

The paper also highlights other research that that found nearly half of all participants in 401(k) plans have either none of their money in equity stocks, or more than 90 percent of their money in stocks, rather than more balanced strategies most advisers suggest.

Ross Kerber can be reached at kerber@globe.com.