The DR would stop the 1pt damage, yes, but it’s still…puzzling. Imagine wearing armor and using weapons that prickle your skin constantly wherever it touches.It's a little bit weird, it sounds like this damage from iron is stopped by its DR so it doesn't actually take any damage unless the weapon also bypasses the DR with coldiron.
Otherwise, I was thinking about this before after seeing the template. They might have their own metals as strong as steel, maybe they use bronze but magically treat it to be just as strong as steel. Magical armour with enchanted leaves instead of scales, ironwood plate mail, etc.
Which may be overthinking. After all, your sword’s grip isn’t usually naked steel, it’s bound in a grip of cloth and/or leather. Metal armor has padding beneath it to absorb blows’ concussive force.
Perhaps even the thinnest layer of silk or paper between flesh and metal is enough to insulate the Fey against the effects of iron & steel.