A new report by the Center for Retirement Research at Boston College suggests IRAs produce even lower returns than defined-contribution plans, which implies trouble ahead given the “massive amount of money” that is being rolled over into IRAs. It said defined-benefits plans, also known as pensions, produced the best returns in a 12-year period.
The report said during 1990-2012, defined-benefit plans outperformed defined-contribution plans by 0.7 percent. It said since this differential remains even after controlling for size and asset allocation, the likely explanation is higher fees in defined-contribution accounts.
The center was recently hired by Gov. Dannel P. Malloy to study the state’s pension plan.
IRAs now hold more money than either defined-benefit or defined-contribution plans. Even
though most IRAs are not sponsored by employers, the center’s report said, most of the money in IRAs has been rolled over from employer plans. And the return that IRA holders earn on their assets will have a substantial impact on their retirement security.
The report said fee costs were responsible for most of the differences. “Saving is too hard
to have fees eat up such a large portion of investment earnings,” the report concluded.
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