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

Dvorak Tomas ()
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Dvorak Tomas: Union College

The B.E. Journal of Economic Analysis & Policy, 2012, vol. 12, issue 1, 26

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.

Keywords: defined benefit; defined contribution; retirement plans; cyclicality; dollar-weighted returns (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1515/1935-1682.3110

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