A Putnam Institute research paper, “Defined contribution plans: Missing the forest for the trees?”, shows 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.