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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)

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.

Suggested Citation

  • Dvorak Tomas, 2012. "Timing of Retirement Plan Contributions and Investment Returns: The Case of Defined Benefit versus Defined Contribution," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-26, May.
  • Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:23
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    References listed on IDEAS

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    1. Ilia D. Dichev, 2007. "What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns," American Economic Review, American Economic Association, vol. 97(1), pages 386-401, March.
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