How do you determine success for retirement plan beneficiaries? You might think of success in terms of growing the funds to a specific valuation. You might also think of comparing returns in retirement funds to certain benchmarks. Asset allocation, rebalancing, and fund selection also come to mind.
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But the factor that has the greatest impact is a plan’s deferral rate. A white paper by Putnam Investments presents the results of changing the funds used in four different scenarios. No matter what adjustments were made to fund selection, the retirement account accumulated about the same amount of wealth.
Putnam also experimented with asset allocation. Then, they played with rebalancing criteria. The asset allocation experiments did result in higher returns but they also added significant risk. Rebalancing produced higher levels of wealth but did not result in higher, absolute annual returns.
When the firm increased deferral rates, however, the difference was impactful. In one case, deferral rates were increased from 3% to 4%. That resulted in an increase in account value to $181,000 from $136,000.
Increasing the deferral rate to 8% from 6% resulted in an account value of $334,000 from $272,000. The tests showed that even the lower deferral rate increase gave better results than any of the other methods.
Neither automatic enrollment nor automatic deferral rate increases carry a high fiduciary risk. And a 1% increase in deferral rates on rates anywhere from 3% to 10% had about the same effect as the 8% deferral rate increase.
Of course, real success in retirement planning should be based on achieving the client’s goals
instead of simply producing a specific account value. A client can end up with a nice account balance when he or she is too old to actually live those dreams that possibly could have been afforded in the interim.
Balancing specific account values with quality of life is a great way you can serve clients at a higher level. Asking what clients expect their retirement money to enable them to do may yield different answers from each client you ask.