Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter May 29, 2012

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

  • Tomas Dvorak

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.

Published Online: 2012-5-29

©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

Downloaded on 29.2.2024 from https://www.degruyter.com/document/doi/10.1515/1935-1682.3110/html
Scroll to top button