Paying too much attention to fund performance in a defined contribution plan is a major error, according to research by Putnam Institute. The organization's analysis shows that fund performance is a much less powerful variable compared with higher deferral rates and asset allocation.
In "Defined contribution plans: Missing the forest for the trees?" Putnam examined different plan design scenarios on a person's retirement income if they made $25,000 a year in 1982 and received a 3 percent cost-of-living increase. It found that the biggest driver of an individual's wealth accumulation is higher deferral rates.
In the test scenario, the individual had a 401(k) plan available to them with a match of 50 cents on the dollar up to 6 percent offered by their employer. They also were invested in a conservative asset allocation across six asset classes. Each scenario was tested for 29 years.
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