August 13, 2012
--- Other
factors are more important to defined contribution (DC) plan success than fund
performance, according to research from Putnam Institute. ---
A Putnam Institute research paper, Defined contribution plans: Missing the forest for the trees?,
shows that a number of variables are at work in determining plan effectiveness,
including deferral rates and plan design, asset allocation, rebalancing
behavior, and individual fund performance. Putnam contends that the industry
would do well to bear in mind this hierarchy when considering ways to boost
retirement preparedness.
“As we look at the progress participants are making toward
securing a better retirement savings outcome, deferral rates are one of the
most important factors to stress, whether in communication to participants
about how to accumulate more wealth or in restructuring DC plans for better
saving and investing success,” W. Van Harlow, Ph.D., CFA, director of research
at the Putnam Institute, wrote in the paper.
While it is not surprising that if a
person saves and invests more, he might be more likely to accumulate greater
wealth, but the study found the size of the difference in terminal wealth can
be dramatic. As an individual’s contribution increases from 3% of income to 4%,
6%, and 8%, the final balance after 29 years jumps from $136,000 to $181,000,
$272,000, and $334,000, respectively.