401(k)s, and other defined contribution retirement plans, with no exposure to private equity or other alternative assets, have outperformed pension plans, which are defined benefit plans, with large amounts of those investments, a new report by the Americans for Financial Reform Education Fund, or AFREF, and the law firm Engstrom Lee found.
The study looked at the performance of 58,000 retirement plans – 401(k) plans and pension plans – over 16 years between 2009 to 2024 and found clear outperformance by the plans without alternative assets.
Alternative assets are investments that fall outside of traditional asset classes such as stocks, bonds, and cash. The additional asset classes that pension funds can invest in include private equity, real estate, infrastructure, and securities such as gold. They tend to carry more risk than traditional investments.
The report disputes Wall Street claims and the White House’s flawed analysis about the financial performance of alternative investments used to justify opening 401(k)s to risky, illiquid, costly, and unstable investment options.
“The 401(k) plans which hold no alternative investments have significantly outperformed pension plans, which are chock full of private equity and hedge fund investments,” Carl Engstrom, founder and partner at Engstrom Lee, said in a statement.“This is by far the most comprehensive and most up-to-date analysis of retirement plan performance.”
Among the report’s findings:
- Using U.S. Department of Labor, or DOL, Form 5500 data from 2009 through 2024, defined contribution plans, known as 401(k) plans, returned an average of 9.13 percent per year, compared with 7.79 percent per year for defined benefit plans, known as pension plans.
- Workers whose savings grew at the average defined contribution rate accumulated about 22 percent more retirement wealth than those whose savings grew at the average defined benefit rate because of the 134-basis-point annual return gap between defined contribution and defined benefit plans compounded over time.
- The defined contribution advantage persists across 5-year, 10-year, and 16-year periods.
- When the comparison is limited to large plans with more than $1 billion in assets, defined contribution plan financial outperformance widens to 168 basis points annually over the 16-year period.
“The private equity industry wants to dump its underperforming assets onto unsuspecting workers saving for retirement, but the Wall Street emperor has no clothes,” said Oscar Valdés Viera, senior policy analyst for private equity and capital markets at AFREF. “The evidence shows that exposing workers 401(k)s to private equity and crypto products will needlessly undermine people’s retirement security.”
Viera said the administration plan is a regressive bailout of the private equity industry.
AFREF recommends that the DOL’s proposed rule allowing alternative assets in 401(k) plans be withdrawn, and that the DOL should publish a review of Form 5500 plan returns. It says any future rulemaking on alternative-investment access in 401(k)s should be done around fee transparency and participant protection rather than around asset expansion.
