The Evolving DC Landscape:Challenge and Innovation
Robert L. Reynolds
President andChie Executive OfcerPutnam Investments
Edited rom a speechgiven to the PutnamDefned ContributionForum, Boston,Massachusetts, onApril 1, 2011
The year 2011 marks a key moment in the evolution o the defned contribution system.That’s because the oldest baby boomers are now turning 65 at the rate o about 7,000a day. They are crossing a once-in-a-lietime inection point — between accumulationand decumulation — and must now turn their lie savings into reliable sources o lie-time income.This individual challenge — one retiree at a time — comes as the DC system as a wholeis in transition, a very positive transition, in my view. The ull impact o the PensionProtection Act o 2006 is now being elt, right beore our eyes, as ideas like auto-enrollment, savings escalation, and guidance to qualifed deault options become thenorm. We’re seeing the system become much more robust.I would argue, in act, that we’ve very nearly solved the puzzle o how to accumulateenough assets in a DC plan to replace a major share o income in retirement. Youngworkers investing in well-designed plans today will likely build enough assets over theircareers to draw 40% or 50% income replacement — just rom their DC plans alone.This is ar more than current DC retirees have been able to achieve. And despite thegloomy warnings we heard just a while ago, total defned contribution plan assets havealmost ully rebounded rom the black swan events o 2008–2009. The DC system hasclearly become America’s primary retirement plan, the main source o retirementincome or uture generations.As I’ve learned over three decades in the business, this system is constantly evolving,adapting, and improving its ability to maneuver through tough markets and delivermore reliable income solutions. To make that case, let me look back at some o the keychallenges or the DC system that were disclosed during the market slump o 2008–2009. Then, I’d like to show you some o the ways that Putnam has responded to thosechallenges.
Key challenges
Here are some o the key concerns about DC that suraced as a result o the “greatstress” test o 2008–2009. We had roller-coaster volatility — made worse because itollowed several years o relative calm. Some liecycle unds with target dates as closeas 2010 held equity shares over 60% and were crushed, setting o a wave o investiga-tions and recriminations in Washington and the press.
The oldest baby boomers are now turning 65 at the rate o about 7,000 a day.They are crossing aonce-in-a-lietimeinfection point —between accumulationand decumulation —and must now turntheir lie savings intoreliable sources o lietime income.
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Key dened contribution policy challenges disclosed by the2008–2009 market slump
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High market volatility
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Excessive risk in some lifecycle funds
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Excessive or opaque DC fees
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Need to shift focus from asset totals to lifetime income capacity
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Need for innovation in lifetime income provision
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New focus on “retirement readiness”
Some members o Congress, the media, and regulators zoned in hard on supposedlyhigh or hidden ees in workplace plans, and in some cases, they had a point. Otherpolicymakers, perhaps more thoughtul ones, called or a shit in ocus rom asset totalsand allocations to the potential lietime incomes, or monthly payouts, that DC planscould generate.There was a wave o interest and innovation in lietime income provisions. The Departmento Labor and the Treasury sent out a request or inormation and got over 800 replies.And “retirement readiness,” defned as bringing participants to the point where theycan successully retire and support their liestyles, became the new industry standard.It’s about time, i you ask me. I’ve always believed that the best test o any retirementsavings plan, solution, or system is how well it succeeds in replacing the income peoplemade while working and sustaining that income or lie.Some people in retirement services reacted deensively to these challenges. But denialwas not our approach at Putnam. It never will be. I believe deeply in the potential o theDC system. But I also believe that when experience discloses real aws, those o us whohave aith in DC’s potential should be the frst to respond to legitimate criticism and fndreal solutions. That’s what we have been doing at Putnam over the past two years. Hereare some examples.
Putnam’s response to volatility — the Absolute Return suite
As many o you know, we actually had a ull suite o Absolute Return unds in develop-ment just as securities markets were caving in 2008. We rolled them out in December othat year and took them public in the frst quarter o 2009. These unds aim to deliver1%, 3%, 5%, and 7% over T-bills, net o ees on a rolling three-year basis — no matter whatmarkets do.
I’ve always believed that thebest test o any retirement savings plan, solution, or system is how well it succeeds in replacing theincome people made whileworking and sustaining that income or lie.
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Absolute Return suite rollout
We’ve had a great response rom the marketplace: over $3 billion in AR sales throughover 10,000 advisors. The AR suite oers advisors and investors a whole new dimensiono diversifcation — across investment philosophies as well as asset classes.Personally, I believe every investor should have some portion o his or her portolio inthe hands o managers who are charged, and incented, to deliver positive results, andwho can’t cite down markets as an excuse.We are convinced that absolute return strategies will earn many key roles in utureinvestment strategies ranging rom deault oerings in DC plans to elements that canbe blended into liecycle, 529, and other risk-mitigated strategies.
Integration of AR strategies in Putnam lifecycle funds
2055 2050 2045 2040 2035 2030 2025 2020 2015 Maturity
PUTNAM RETIREMENTREADY FUNDS’ GLIDE PATHMoney marketAbsolute ReturnAsset Allocation100%50%0%
We’re suciently confdent o the benefts that may accrue rom seeking to lower vola-tility that we now use RetirementReady® Funds as the deault choice in the 401(k) plano our own Putnam employees. I would note, by the way, that Putnam’s own liecycleoering, RetirementReady, already had a quite conservative roll-down, reaching 25%equity exposure at its target date.
I believe every investor should have some portion o his or her portolio in the hands o managers who are charged, and incented, to deliver positiveresults, and who can’t cite downmarkets as an excuse.
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The Evolving DC Landscape: Challenge and Innovation
Edited from a speech given to the Putnam Defined Contribution Forum, Boston, Massachusetts, on April 1, 2011
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