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Timing of Retirement Plan Contributions and Investment Returns: The Case of Defined Benefit versus Defined Contribution

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  • Dvorak Tomas

    ()
    (Union College)

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    Abstract

    This paper examines the impact of the timing of contributions to defined benefit (DB) and defined contribution (DC) plans on investment returns. I show that net contributions to DB plans are counter-cyclical, while net contributions to DC plans are uncorrelated with the business cycle. Given the past mean reversion in equity prices, the counter-cyclicality of net contributions to DB plans means that dollar-weighted returns on DB plans are higher than the geometric average of annual returns. Therefore, using dollar-weighted returns as a measure of investment performance, the advantage of DB plans over DC plans is greater than using geometric average returns. Overall, I find that dollar-weighted returns on DB plans are more than one percentage point higher than that on DC plans.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 12 (2012)
    Issue (Month): 1 (May)
    Pages: 1-26

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    Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:23

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    Web page: http://www.degruyter.com

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