Participant contributions to 401(k) plans have a far greater impact on retirement wealth than mutual fund performance and asset allocation, according to a Putnam Investments study. The study, which compared those three components of defined contribution savings over a 15-year period, found that mutual fund performance had the least impact.
If investors were able to accurately predict which mutual funds would perform in the top quartile and invested in them, the investors' retirement wealth would be 6% higher over the 15-year period than if they selected bottom-quartile funds, according to the study. Putnam found that changing the allocation from a conservative to a more aggressive portfolio increased overall asset size by roughly 20%. However, increasing participant contribution to 4% from 2% of salary had 90 times the impact of changing to top-quartile funds from bottom-quartile, over 15 years.
The study looked at Lipper data from Jan. 1, 1990, to Dec. 31, 2004.
