Traditional pension funds are generally run by professional money managers, following well-known rules for making prudent investments.
Section 401(k) plans are run by their owners -- in other words, the likes of you and me -- following who knows what strategy, constrained only by the investment options offered by their employers.
So how have these two very different types of plans performed over the years?
About the same, according to a new study of average annual returns of traditional pensions and 401(k) plans from 1990 to 2002.
On average, traditional plans returned 10.84 percent a year during that time, while 401(k)s have racked up 10.77 percent, the study, by benefits consultant Watson Wyatt Worldwide, found.
If that's the case, why are traditional plans apparently in so much trouble -- you've probably heard all the cries of doom recently -- while at least policymakers seem satisfied with the 401(k) system?
That's an interesting question, which we'll get back to in a minute, but first let's take a look at those performance numbers.
The similarity of total return masks some notable differences in the paths the two types of retirement plans followed. Pension plans, presumably investing in a diversified portfolio of stocks and bonds and periodically rebalancing to maintain a predetermined ratio, ran slightly ahead of 401(k)s during most of the good years of the 1990s. But the 401(k)s more than made up for that with a few big years, especially 1999 when they outpaced the traditional funds by more than 5 percentage points.
And while that home-run strategy, if that's what it was, paid off during the boom, the traditional pensions' approach did much better when things turned bad. Both sides lost money during that period, but the k-plans' losses were clearly worse.
Watson Wyatt's Sylvester J. Schieber said he suspects the difference lies in k-plan owners' reluctance to rebalance their portfolios when stocks shot ahead.
