Size and Investment Performance: Defined Benefit vs. Defined Contribution Pension Plans
69 Pages Posted: 6 Oct 2020 Last revised: 9 Oct 2020
Date Written: October 6, 2020
We examine the investment performance of over 160 thousand U.S. private pension plans. We find significant economies of scale in performance and administrative expenses, which are more prominent for defined benefit (DB) plans than for defined contribution (DC) plans. DC plans outperform size-matched DB plans in most size ranges in benchmark-adjusted returns. Size also drives the plan termination probability, especially among DB plans, and the sponsor's choice between the DB and DC structures. Our results suggest a size-based explanation for the great shift toward DC plans centering on the relative efficiency of these two organizational forms in pension asset management.
Keywords: pension fund, defined benefit plan, defined contribution plan, performance evaluation, economy of scale
JEL Classification: G11, G23, G50, J32, D14
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