Policymakers should support increased use of products that provide reliable lifetime income, such as lifetime income and draw-down funds, guaranteed pay-out plans and annuities, according to Robert L. Reynolds, president and chief executive officer of Putnam Investments. To foster confidence in such products, Reynolds called on Congress to create an optional national insurance charter and a new Lifetime Income Security Agency empowered to approve assured lifetime income products. The new agency also would administer an industry-funded, risk-based national insurance fund to protect current and future retirees, much like the bank deposit insurance fund overseen by the Federal Deposit Insurance Corporation.
In a speech at the Retirement Income Industry Association’s 2011 Spring Conference in Chicago today, Reynolds also warned that budget-cutters in Washington might be tempted to target the deferral of federal income taxes on contributions to defined-contribution plans, such as 401(k) plans, individual retirement accounts and variable annuities. Slashing or eliminating these tax incentives, Reynolds noted, would reduce the motivation to save at a time when many Americans already face a shortfall in their retirement savings and lack confidence in their ability to enjoy a secure retirement.
“As the oldest Baby Boomers reach the traditional retirement age of 65, we need to go beyond helping Americans accumulate assets for retirement to helping them draw those assets down to provide reliable income throughout retirements that could last 20 to 30 years or more. It’s even more challenging to draw assets down sustainably as it was to accumulate them in the first place,” said Reynolds.
“There’s a new, very healthy wave of competition among asset managers and insurers to serve retirees’ income needs,” Reynolds explained. “If we could create a new agency to hold these products to rigorous standards and back them with an industry-financed fund like the FDIC, we could see a real surge in consumers’ confidence and broad emergence of innovation from firms seeking to create lifetime income solutions for working and retired Americans. We need a partnership between private industry and public policy to make that happen.”
Reynolds noted that sales of annuities, have been flat to negative – falling from $218 billion in 2002 to $210 billion in 2010* – despite two market crashes that ought to make guaranteed income more attractive. Multiple reasons account for that, according to Reynolds, including costs, issues of transparency, consumers’ reluctance to lose control of sizeable shares of their life savings and concerns that a single provider might not be able to deliver the full benefits promises for decades into the future. A new federal agency to review lifetime income offering and back them up with funded guarantees could address many of those fears, he suggested.
The Lifetime Income Security Agency (LISA) that Reynolds proposed would be empowered to approve, or, conversely, deny approval to, the full range of guaranteed lifetime income products, including annuities or non-annuity lifetime income funds. It also would administer a risk-based national insurance pool, funded by the industry itself, to ensure the safety of investor assets. Insurers with top-tier credit scores and those which offer very conservative annuity or draw-down plans would pay much lower fees into the pool than those with lower scores or more aggressive plans. The Lifetime Income Security Agency would be authorized to disapprove products, and deny them coverage.
“Federal review and a risk-based assessment for lifetime income offerings would help to curb the temptation that we have seen again and again for lifetime income providers to make unsustainable promises whose failure then further erodes consumer trust,” said Reynolds. “The impact on confidence in lifetime income provision could be as great as what the FDIC achieved after the banking crises of the Great Depression, and would come at an equally critical turning point in our history, the retirement of the Baby Boomers.”
Possible Budget-Cutting Moves to Reduce Tax Incentive for Retirement Savings
Reynolds also noted that several recent proposals in Washington to reduce the federal budget deficit include limits on so-called tax expenditures, such as the deferral of taxes on contributions to many IRAs, 401(k) plans, variable annuities and other retirement savings vehicles. Currently, savings in many of these accounts grow tax-free until they are withdrawn at retirement, and then are taxed at a rate that typically is lower than during the accountholder’s working life. Some proposals under discussion would limit or eliminate the deferral of taxes on contributions; this would generate additional tax revenue now, according to Reynolds, but could be a disincentive for individual savers or for businesses to offer workplace savings plans. “It would be a terrible policy mistake to curb federal profligacy by undermining incentives for private saving. America needs to move to solvency not just for the government, but at the household level, too,” he added.
“The tax reform law of 1986 severely restricted the tax benefits of 401(k) plans and IRAs,” Reynolds continued. “With Baby Boomers now in or approaching retirement, the stakes are much higher now than they were 25 years ago. We have to get budget deficits under control, but we have to do it the right way – by encouraging savings that fuels investment, business formation and job creation. In the long run, the only tolerable way to overcome our deficit challenge is through economic growth – led by the private sector and fueled by Americans’ own savings. Anything that undermines personal and workspace savings also undermines those goals. Congress should dismiss such ideas out of hand.”
Reynolds, a 30-year veteran of the retirement industry who earlier this year was named among the most influential persons in the 401(k) sector by a leading publication, has long been an outspoken advocate for reforming and revitalizing the nation’s public and private retirement systems. He previously has called for universal adoption by workplace plans of auto-enrollment, savings escalation and guidance to wise asset allocation, all of which were authorized by the Pension Protection Act of 2006. He also has called for extending the benefits of workplace savings to workers who have no access to a job-based retirement plan through ideas such as an Auto-IRA payroll deduction proposal, and has called on Congress to adopt reforms to save Social Security.
Putnam Investments and Retirement
Since Reynolds, a 30-year veteran of the retirement savings industry, became Putnam’s President and CEO in 2008, the company has deepened its commitment to the retirement market and launched a series of innovations and initiatives to meet emerging customer needs. These retirement initiatives include a Lifetime IncomeSM Analysis Tool for plan participants and new levels of fee transparency disclosures designed to provide the clearest, most complete overview of fees and expenses in the workplace savings industry.
Putnam also has announced plans to launch a suite of income-oriented mutual funds that aim to help advisors work with retirees in developing strategies for monthly income flows, at varying levels of risk tolerance, to flexibly address their changing lifestyle financial needs throughout retirement. The product suite, comprised of Putnam Retirement Income Fund Lifestyle 1, Putnam Retirement Income Fund Lifestyle 2, and Putnam Retirement Income Fund Lifestyle 3, is expected to have broad applicability for defined-contribution, IRA and other retirement assets. **
Putnam also has expanded the services it offers to 401(k) retirement plans and has developed products to meet the needs of those planning for or already in retirement. The firm has created a platform that provides flexible and scalable services and solutions for advisors, consultants and their plan sponsor clients in every segment of the retirement market.
Putnam RetirementReady® Funds, the firm’s suite of 10 target-date/lifecycle retirement funds, were the first suite of lifecycle funds to integrate Absolute Return Funds, which seek positive returns over a period of three years with less volatility than has been associated with traditional asset classes that have earned similar rates of return. Employed in retirement portfolios, Putnam Absolute Return Funds*** are intended to pursue positive returns in up and down markets, to help protect against the harmful effects of adverse investment returns and to seek to reduce volatility.
About Putnam Investments
Founded in 1937, Putnam Investments is a leading global money management firm with over 70 years of investment experience. The firm was recently named one of the top 15 mutual fund families by Barron’s/Lipper for the second consecutive year. At the end of February 2011, Putnam had $125 billion in assets under management, including mutual fund assets of $69 billion and institutional assets of $56 billion. Putnam has offices in Boston, London, Frankfurt, Amsterdam, Tokyo, Singapore and Sydney. For more information, visit putnam.com.
Putnam mutual funds are distributed by Putnam Retail Management.
* 2010 Annuity Fact Book prepared by the Insured Retirement Institute
** A registration statement relating to this security has been filed with the Securities and Exchange Commission but has not yet become effective. This security may not be sold, nor may offers to buy be accepted, prior to the time the registration statement becomes effective.
The information in the prospectus (or Statement of Additional Information) is not complete and may be changed. This security may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This is not an offer to sell this security and is not a solicitation to buy this security in any state where the offer or sale is not permitted. No offer to buy the security can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.
***Putnam’s Absolute Return Funds are not intended to outperform stocks and bonds during strong market rallies.