Defined contribution plan sponsors are "missing the forest for the trees" in running their plans, according to Jeffrey Saef, director of investment strategy and research for Putnam Investments, Boston.
"Defined contribution plan sponsors spend a lot of time worrying about the investment options in their plans," said Mr. Saef. "They're focusing their time on the wrong places."
Mr. Saef's group recently did a study of what factors have the most impact on the performance of a participant's 401(k) account and found a participant's deferral rate has the biggest impact on account growth.
The study cited a hypothetical 28-year-old participant who joined the 401(k) plan on Jan. 1, 1990, making $40,000 a year with a 3% annual salary increase, who had a 6% deferral rate with a company match of 0.5% up to 6%. That employee would have had an additional $72,000 in his 401(k) account by March 31, 2004, than a person with a 2% deferral rate.
That example assumed investment in fourth-quartile mutual funds using six core funds — one domestic large-cap growth equity, one domestic large-cap value equity and one domestic small-cap core equity fund; an international equity fund; a fixed-income fund; and a money market fund. Investing in first-quartile funds would have added only about $2,000.
While the report said that changing the asset allocation of the 401(k) account to balanced and growth stock investments would have a "modest" impact on the account, using lifestyle/asset allocation funds that are rebalanced regularly and appropriate to the age and lifestyle of the individual can have a positive impact on the growth of an individual's 401(k) account.