Increase Contributions to Increase Retirement Wealth

The study, based on a hypothetical “average Joe” who is invested in a 401(k) plan, compared the effects of mutual fund performance, asset allocation, and contribution level on retirement savings over a 15-year period. According to a Putnam news release, mutual fund performance had the least impact on savings.

According to the study, even if investors knew in advance what funds would perform in the top quartile and invested in those, their savings would only grow 6% more over 15 years than if they invested in funds in the bottom quartile. However, changing the asset allocation from a conservative to an aggressive approach increased results by over 20%, the news release said.

Increasing the contribution level had the most impact on the retirement savings over 15 years. A 2% increase in contribution rate had 90 times the impact that changing from bottom to top quartile funds did, according to the study.

“The conclusion of this study is simple, but too often ignored. Savingmore is the most powerful way to end up with more. Searching for theperfect mutual fund or allocation is a far less effective approach,”said David Tyrie, Director of Retirement Services at Putnam Investments, in the news release. He noted that employers are recognizing this and more are turning to automatic enrollment and automatic deferral increases to help participants.

As an aside to the main study, Putnam also compared the impact of annual rebalancing to a target portfolio during the 15-year period versus not rebalancing. It found that, with rebalancing the total return of the portfolio was $134,075, while the portfolio that was not balanced had a total return of $129,767.

Tyrie pointed to Lifestyle or Lifecycle funds with automatic rebalancing for helping participants grow their retirement wealth.

A Powerpoint presentation of Putnam’s study can be viewed here .