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.
The B.E. Journal of Economic Analysis & Policy (BEJEAP) is an international forum for scholarship that employs microeconomics to analyze issues in business, consumer behavior and public policy. Topics include the interaction of firms, the functioning of markets, the effects of domestic and international policy and the design of organizations and institutions.